Stocks find bid in Europe after slipping in Asia-Pacific
Capital markets are calmer today. The market is digesting the FOMC minutes, where officials pointed to an aggressive path to reduce the balance sheet and confirmed a “swift” campaign to raise the federal funds rate to neutral. Benchmark 10 years yields are lower, with the US falling a few basis points to 2.58%. European yields are 1 to 3 basis points lower. After yesterday’s losses in US equities, including a 2.2% drop in the NASDAQ, Asia-Pacific equities struggled. The biggest markets, Japan, China, Hong Kong, South Korea and Taiwan all fell more than 1%, dragging the MSCI Asia-Pacific index down for the third consecutive session. With the help of healthcare and utilities, the Stoxx 600 is posting modest gains after falling 1.5% yesterday. US futures contracts are firmer. In the foreign exchange market, the currencies of the dollar block are heavy. The Swedish krona, the British pound and the yen are posting weak gains. Among emerging markets, the Hungarian forint and South African rand are lagging, while the Polish zloty is still in bid after the central bank surprised with a 100 basis point rise yesterday. Gold remains calm, near the middle of this week’s $1915-$1945 range. May WTI is near yesterday’s low (~$95.75). Last month’s low was closer to $92. US natgas is calm above $6, while the European benchmark reversed yesterday’s 1.2% gain and more. It is close to a two-week low. Iron ore fell 3% to register its third consecutive decline. Copper prices are down about 1% for the second session. Wheat continues to pare back the 6% gain recorded Monday-Tuesday.
The decline in the Japanese yen has reached a preliminary pain threshold. We have followed the change in tone of the official comments. They are not earth-shattering, but what we describe as low rungs on a climbing ladder. The industry has also begun to voice its concerns. First, it was the president of the Japan Iron and Steel Federation, who said the risks of a weaker yen are “unprecedented”. Earlier today, the president of the Japan Chamber of Commerce and Industry said a weaker yen had a bigger negative than positive impact on the economy. This does not mean that the yen will strengthen. The thing is, the easy part of the move is behind. We consider the dollar-yen exchange rate to be generally a range-bound pair, and when trending, it often moves from one range to another. We suspect a new lineup is being forged. The JPY125.00-JPY125.50 may mark the upper end. We thought the lower end of the range is in the JPY119.50-JPY120.00 area, but at least initially JPY121.00 may be enough.
China said its reserves fell by $25.8 billion in March. This is the third consecutive decline after increasing every month in Q4 21. The decline brings the dollar value of China’s reserves to its lowest level since last March. The combination of a stronger dollar and weaker bonds has resulted in what appears to have been a valuation adjustment. We don’t think there’s much to read there in terms of policy or intervention. More worrying is the prolonged lockdown in Shanghai and doubts it will prevent the spread of Covid to other regions. Some estimates suggest that China’s oil demand has fallen by around 450,000 barrels per day. Reports also suggest that tankers from Russia, Iran and Venezuela are clogging ports and creating a logistical nightmare.
Australia’s trade balance in February was considerably weaker than expected. The A$7.46 billion surplus contrasts with the expectation (median Bloomberg survey forecast) of A$11.65 billion. And to add insult to injury, the January surplus has been revised down by A$1 billion. What happened? Exports were flat in February and January’s 8% increase has been revised to 6%. Imports fell 2% in January and are expected to increase 2% in February. Instead, they increased by 12%. Ironically, Australia’s trade surplus was around 15% lower than in February 2021. Iron ore exports fell 6.7% on the month, while coal exports fell 9 %. Natural gas exports fell 5.3%. Exports of gold, wheat and meat increased. The surge in imports was led by industrial supply and fuels, reflecting the surge in prices. Separately, senior Australian intelligence officials called the Prime Minister of the Solomon Islands after the recent signing of a security pact with Beijing. Solomon’s Prime Minister Sogavare assured that Australia remained his “partner of choice”, Sogavare denied that the pact would allow China to establish a permanent military base. The deal has apparently not been signed either.
The dollar tested the JPY124.00 level yesterday and is holding below today. It finds support near JPY123.50. Further consolidation in the near term is the most likely scenario. The Australian dollar continues to unwind its recent gains. On Tuesday, in response to the RBA removing the word “patience” from its forecast, the Aussie rose to $0.7660. It fell to around $0.7485 yesterday and is pushing a bit lower today. A break of the $0.7470 zone will weaken the technical tone and open the door for a test on the $0.7400 zone. The greenback was today confined in an unusually narrow range against the Chinese yuan (~6.3580 CNY-6.3645 CNY). The PBOC pegged the benchmark dollar rate at CNY 6.3659, slightly lower than the Bloomberg survey’s median projection of CNY 6.3662.
The unexpected drop in German factory orders reported yesterday appears to have little impact on industrial production. It rose 0.2%, which was the median forecast (Bloomberg survey). However, January’s sharp downward revision (1.4% vs. 2.7%) takes away some of the shine from the report. The German economic calendar is light next week. The highlight is April’s ZEW Investor Survey, which deteriorated markedly in the face of rising energy and the war in Ukraine.
Minutes from last month’s ECB meeting are still awaited. It tends not to be a major driver of capital markets. Meanwhile, ECB President Lagarde is said to have contracted Covid. The symptoms are said to be “reasonably mild”, but that seems to imply that she will not attend the ECB meeting next week. The meeting, which does not feature new guidance, was expected to focus on the bond buying program continuing through the second quarter. in the third quarter were supposed to be data dependent, but should end to give the central bank room to raise rates. The swap market has about 55 basis points of discounted tightening for the second half.
The euro extends its losses. It has recorded lower highs and lower lows since the key reversal on March 31, when it peaked near $1.1185. In Europe today, it tested the $1.0865 zone. Last month’s low was near $1.08. It seems too far today, and an option at 1.52 billion euros will be launched. There’s another set at $1.09 for 1.83 billion that also expires today. The pound was little changed in the European morning near $1.3070. It is consolidating above yesterday’s low a little below $1.3050. Tuesday’s outside bearish day saw follow-up selling yesterday and sideways action today.
Yesterday’s FOMC minutes confirmed what the market was expecting. The reduction in the balance sheet will probably begin next month. It will quickly (within a few months) reach $95 billion per month ($60 billion in treasury bills and $35 billion in mortgage-backed securities). Remember that over the 2017-2019 period, the roll-off was capped at $50 billion. At the new pace, the Fed’s balance sheet will shrink from around 37% of GDP to around 23% by the end of 2024. It was just under 20% of GDP at the end of 2019.
Furthermore, as the summary of economic projections indicates, there has been a dramatic change in inflation expectations between December 2021 and March 2022 (projections for the PCE deflator have fallen from 2.6% to 4%). Some Fed officials who wanted to hike 50 basis points to initiate the cycle held back due to uncertainty over Russia’s invasion of Ukraine. Those reservations have apparently been eased, and the minutes confirm what we’ve called a “campaign” that will bring the fed funds rate back to neutral (~2.25%-2.50%). The fed funds futures market has 212 basis points of discounted tightening for the rest of the year.
The United States released weekly jobless claims and consumer credit in February. However, Canada, Mexico and Brazil have more interesting/important releases today. In Canada, the focus is on the budget. Trudeau’s minority government seems more committed to its social goals and seems less concerned with moderating fiscal policy. Several measures are expected to address the housing market, including a two-year ban on foreign purchases for non-primary residences. Rising oil prices will provide the government with a windfall, which should help pay for new spending initiatives. Tomorrow, Canada will release March employment figures. Mexico and Brazil release March CPI figures. Mexico’s CPI is expected to have edged up to 7.4% (7.28% in February). The base rate is also expected to increase slightly. The central bank does not meet until May 12. Brazil’s IPCA inflation measure is expected to have accelerated to 11% from 10.54% in February. Brazil’s central bank will next meet on May 4. Finally, Peru’s central bank is expected to rise 50 basis points today to take the benchmark rate to 4.5%.
The US Dollar posted a bullish hammer candlestick on Tuesday as it bounced off the 1.2400 CAD area. It rose sharply yesterday and tested CAD1.2570 today. The zone of 1.2580 CAD corresponds to the retracement (38.2%) of the decline since March 15 (high ~1.2870 CAD). The next retracement (50%) is near CAD1.2635. The greenback bottomed against the Mexican peso on Monday around MXN 19.7275. It hit 20.1950 MXN yesterday and is consolidating in a tight range today (~20.1155 MXN-20.1825 MXN). The MXN20.14 area is technically interesting, but the retracement objective (38.2%) of the leg down that started a month ago is at MXN20.39.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.