What would it look like if Russia were about to attack Ukraine? Cyber attacks. To verify. Violation of the ceasefire with the separatist regions. To verify. Nearly 2,000 such breaches were recorded on Saturday alone, according to the Organization for Security and Cooperation in Europe. Extension of military exercises with Belarus. To verify. However, just as Asian markets were opening, Macron’s proposal for a Biden-Putin summit was accepted in principle. However, risk appetite remains moderate. The MSCI Asia Pacific index extended last week’s 0.9% drop. The Stoxx 600 index posted modest losses around noon after falling nearly 1.9% last week. It has only increased by a week so far this year. US futures are narrowly mixed, although stock and bond markets are closed today. European bond yields are firmer by 2 to 4 basis points. It is perhaps in the foreign exchange market that risk appetite appears strongest. The dollar is offered against most currencies today, and the Japanese yen is lagging behind. The Aussie dollar and Scandis lead the advance. The Swiss franc is also one of the strongest major currencies. Among emerging market currencies, central European currencies are currently the best performers. The JP Morgan EM FX Index is up for the fifth session of the past six. Gold initially extended its gains and saw $1908 before moving back into the $1890 area. April WTI is hovering around $90 a barrel. US natgas is up around 5.3% after losing so much in the past two sessions. European natgas is up 1.7% after falling 2.8% before the weekend. Iron ore prices jumped 4.6% to recover some of last week’s 11% decline. Copper is firmer for the first time in three sessions.
Japan’s preliminary PMI underscores expectations that after rebounding in Q4 21, the world’s third-largest economy is struggling at the start of 2022. New covid restrictions imposed in late January are taking their toll. Manufacturing activity is slowing down. The manufacturing PMI fell to 52.9 from 55.4. Disappointed services. The services PMI fell to 42.7 from 47.6, which kept the composite PMI well below the 50 boom/bust level at 44.6 from 49.9.
Australia’s flash PMI was better. The manufacturing reading rose from 55.1 to 57.6. The services PMI fell from 46.6 to 56.4. The composite recovered to 55.9 from 46.7. The Reserve Bank of Australia meets on March 1. The market is expecting a rate hike in July, which Governor Lowe has opposed.
The Dollar is holding below JPY 115.00 in European sessions after peaking near JPY 115.10 in Asian trading. Initial support is around 114.80 JPY pre-weekend low tested. Below, close support is seen around 114.60 JPY, and a break could stimulate a move towards 114.00 JPY-114.20 JPY. The Aussie dollar is again trying to hold above $0.7200. It has traded above this level on an intra-session basis for the past three sessions, but a close above this level has been elusive for a month. The next upside target is the peak earlier this month near $0.7250. The Chinese yuan is one of the weakest currencies today. It is about 0.15%. The US Dollar initially edged closer to CNY 6.32 before rebounding almost to the pre-weekend high of CNY 6.3365. After setting the benchmark dollar rate for the past four sessions lower than predicted by the Bloomberg survey, the PBOC has returned to its more normal practice. The dollar was pegged at CNY 6.3401 against the Bloomberg survey median of CNY 6.3388. Prime lending rates remained unchanged, as widely expected. Note that the yield on Chinese 10-year bonds rose nearly four basis points to 2.83%. The biggest state-owned banks cut mortgage rates for homebuyers in Guangzhou, following last week’s report that loans in other cities were reducing down payment ratios.
The Eurozone February aggregate flash PMI was stronger than expected. The manufacturing PMI slipped slightly but at 58.4 (vs. 58.7) remains at elevated levels. The services PMI rose to 55.8 from 51.1, bringing the composite to 55.5 from 52.3. Prices jumped by a record amount. Preliminary German readings were in line with the aggregate. Manufacturing slowed slightly (58.5 from 59.8), while services activity accelerated (56.6 from 52.2). The composite went from 53.8 to 56.2. In France, the services PMI exceeded the manufacturing PMI as the post-Covid recovery strengthened. The manufacturing PMI fell from 55.5 to 57.6. The services PMI fell from 53.1 to 57.9. The composite stands at 57.4 after 52.7.
The UK manufacturing PMI is stable at 57.3. The market had seen the risk of a slight decline. The services PMI fell from 54.1 to 60.8. This took the composite PMI to 60.2 from 54.7. This is the highest since last June. A week ago, the swap market had priced around an 80% chance of a 50bp rally at the mid-March BOE meeting (March 17). He was demoted at around 37% chance.
The Euro covered the last three-day range today. It first cleared the pre-weekend low to near $1.13 before bouncing back to near $1.14 in late Asian trading. It was met by a wall of sellers that took it down to $1.1355 before stabilizing. It traded on both sides of the pre-weekend range, and the close is considered technically significant if it falls outside the $1.1315-$1.1380 range. The eventual Biden-Putin summit, provided there is no invasion, looks likely for next week with the Blinken-Lavrov meeting later this week setting the stage. The British Pound is near this month’s highs (~$1.3645). This is also the fourth session of higher lows. The next target is the 200-day moving average near $1.3685, and it has not stabilized above since last September. Indeed, it has only closed above $1.36 once in the past month. Intraday momentum indicators suggest that the session high may be in place.
US stock and bond markets are closed today. Tomorrow, the PMI flash, house prices, the Conference Board consumer confidence survey and the Richmond Fed manufacturing survey are due. Mid-week, Q4-21 GDP is expected to be revised slightly higher. At the end of the week, personal income and consumption figures for January are released. Alongside them, the PCE deflator. The title, which the Fed is targeting, should drop from 5.8% to 6%. The base measure, which Fed officials often refer to, is expected to drop from 4.9% to around 5.2%. Still, the market shrunk the odds of a 50 basis point hike by the end of the March 16 FOMC meeting. A week ago, fed funds futures implied about 65% odds, and now there’s less than 25% move. A week ago, the market was pricing in a roughly 50% chance that there would be increases of 175 basis points instead of 150 basis points this year. Now the market is just below 150 bps.
Canada has a light economic newspaper this week. The Bank of Canada meets on March 2. The swap market is pricing in a little over 50% chance of a 50 basis point rise. A week ago, there was a little better than a one in three chance. Meanwhile, reports say the policy has emptied downtown Ottawa of protesters. Nearly 200 arrests have been made and since yesterday more than 200 bank and business accounts have been frozen. Businesses in the city center have not yet returned to normal.
Mexico reports CPI figures every two weeks in the middle of the week. The year-over-year pace is expected to remain above 7.0%, where it had been since mid-November last year. Still, with a 25bp Fed hike more likely than 50bp Banxico, which meets March 24, is also expected to rise a quarter point. Recall that the last two moves were 50bp. December retail sales, also due on Wednesday, are dated, while January’s trade balance at the end of the week is expected to show a sharp deterioration. The highlight of the week for Brazil is this month’s IPCA inflation reading (expected mid-week), which is expected to have risen from 10.2% to 10.6%.
The US dollar was broadly range against the Canadian dollar here in February. Support is visible in the CAD1.2650-CAD1.2660 area. The cap is CAD 1.28. The broader risk environment appears to have overshadowed the yield differential driver and the impact of commodities. Meanwhile, the greenback has been selling below the 200-day moving average against the Mexican peso and continues to hold below (~20.3450 MXN). Last week’s low was around 20.2360 MXN. There is little chart support until closer to MXN20.12 last October low. The US dollar fell to nearly BRL 5.11 ahead of the weekend, its lowest level since last July. Support is visible in the BRL5.00-BRL5.05 area. Last year’s low was set in June near BRL 4.8935. Strong foreign demand for Brazilian bonds and equities could fuel a new test.