Cautious Markets after China Disappoints

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Marc Chandler
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Overview: Ukraine’s Mariupol refuses to surrender as the war is turning more brutal according to reports. Iran-backed rebels in Yemen struck half of a dozen sites in Saudi Arabia, driving oil prices higher. China’s prime lending rates were unchanged. The MSCI Asia Pacific Index, which rallied more than 4% last week, traded heavily today though China and Taiwan’s markets managed to post small gains. Tokyo was closed for the spring equinox. Europe’s Stoxx 600 is steady after rising 5.4% last week.  US futures are trading softer. Last week, the S&P 500 rallied 6.2%. Benchmark yields in Europe and the US are 2-4 bp higher, which puts the US 10-year Treasury near 2.18%. The greenback is mixed with the euro and Swiss franc posting minor gains. However, the dollar-bloc currencies, Scandis, and sterling have a softer bias. Among the emerging markets, central European currencies are faring best. Asian currencies are mostly lower. The JP Morgan Emerging Market Currency Index is lower for the third consecutive session, but it did rise about 3% last week, its first advance in four weeks.  Turning to commodities, gold is in a $1917-$1929 range today, around the middle of the $1900-$1950 range.  Oil is rising for the third session.  In the middle of last week, April WTI bottomed near $95 and today it is probing $109 a barrel.  US natgas is up about 0.7% after a 3% gain last week.  Europe’s benchmark is up about 0.25% after falling 4.4% at the end of last week.  It tumbled 24% last week after 34.5% the week before.  Australia has banned alumina shipments to Russia.  Iron ore fell 1.5%. It fell a little more than 4% last week.  Copper is off 1.3%, giving back nearly half of last week’s gain.  May wheat is up 1.6% after falling a little more than 12% over the past two weeks.  Egypt, which depends on Russian and Ukrainian wheat devalued the pound (~11%) and hiked rates by 100 bp.

Asia Pacific

In the middle of last week, China’s Vice Premier He signaled a new phase in what has become a stop-go dynamic in economic policy.  Officials move between structural reforms and pro-growth measures.  He appeared to indicate that the crackdown on technology platforms was nearly over, support would be given to the property market, efforts to stimulate the economy would be delivered, and the economic consequences of the Covid policy would be minimized.  This led to expectations that the loan prime rates would be set lower.  They weren’t.  The one-year loan rate remained at 3.7% and the five-year benchmark was unchanged at 4.6%.  The focus has shifted back to the possibility of a cut in reserve requirements.  However, officials also seem to be emphasizing targeted measures too.  Recall that last week, the NASDAQ Golden Dragon China Index that tracks Chinese companies that trade in the US snapped a four-week 31% drop with a 26.3% advance.

Rising energy costs will take a toll on east Asian external balances and boost inflation.  These forces are already evident in Japan.  Tokyo’s March CPI is due late this week and it is expected to rise to 1.2%, which would be the highest since April 2019. Earlier today, South Korea reported trade figures for the first 20 days of March.  Export growth slowed (10.1% vs. 13.1% year-over-year), while imports jumped (18.9% vs. 12.9%).  Taiwan reported strong February exports (21% year-over-year), but the Economic Ministry warned that exports are likely to slow to 9%-11.8% this month.

The dollar continues to trade firmly against the Japanese yen.  It remains within striking distance of the pre-weekend high near JPY119.40 and has held above JPY119.00 today, where a $545 mln option expires.  The next big chart point is JPY120, though the upper Bollinger Band is near JPY119.60.   The Australian dollar initially extended last week’s nearly 1.7% rally that lifted it back above $0.7400 after having begun last week close to $0.7165.  However, the gains fizzled near $0.7425, shy of the $0.7440 spike-high earlier this month.  A break now of the $0.7360 area would suggest a corrective phase has begun.  The Chinese yuan has become somewhat more volatile over the past week or so.  Three-month implied vol jumped to nearly 4.8% last week, which is the highest since last July.  Today, it remained with in the pre-weekend range (~CNY6.3480-CNY6.3670).  After offshore investors dumped Chinese bonds and stocks last month, and given the policy shift signal, anew buying is expected.  The PBOC set the dollar’s reference rate a little softer than expected (CNY6.3677 vs. CNY6.3685).

Europe

The highlights from Europe this week include UK Chancellor Sunak’s Spring Budget Statement on Wednesday shortly after the February price gauges, and the flash March PMI readings. On Thursday, Norway’s Norges Bank is expected to deliver its third hike in the cycle that began last September.  A 25 bp hike will bring the deposit rate to 0.75%.  The swaps market discounts about 95 bp of tightening over the next 12 months.  The Swiss National Bank also meets on March 24, but it will most likely stand pat with its key policy rate at minus 0.75%.

Germany is putting together a supplemental budget on top of the current projections.  Recall that the initial budget called for borrowing almost 100 bln euros.  That does not include the 100 bln euro increase in military spending that will draw on a special one-off fund that is exempt from the debt-brake.  France is also putting together a package of new measures to cushion the blow from higher energy costs and disruptions associated with the war.  Several countries, in addition to Germany and France, are looking for ways to subsidize energy bills.  The UK’s Sunak is seen going forward with the payroll tax for the National Health Services but may reduce some fuel tax.

The euro is trading with the pre-weekend range (~$1.1005-$1.1120).  It has been confined to about 20 pips on either side of $1.1050.  Recall that last Monday, the euro traded briefly below $1.09 and recovered to almost $1.1140 last Thursday.  The ECB’s Lagarde, BOE’s Bailey, and Sweden’s Ingves speak tomorrow at a BIS forum.  The MACD and Slow Stochastics are trending higher, but the US 2-year premium over Germany continues to trend higher and now is above 230 bp, up almost 35 bp this month.  The euro’s gains look largely correctively in nature.  The $1.1150 area is the (50%) retracement of the slump since the February 11 US warning that the Russia’s attack was imminent. The next retracement (61.8%) is slightly above $1.1230. A break of $1.0970 is maybe an early warning that the correction is over.   Sterling is coiling.  It is trading within Friday’s range, which itself was inside Thursday’s range (~$1.3085-$1.3210).  The price action is often associated with a continuation pattern, which in this case would be higher given that it had bottomed near $1.30.  We suggested the $1.3200 area could be a neckline to a bottoming pattern that would project toward $1.3400.  A break of the $1.3080 area would undermine the pattern.

America

The market continues to digest last week’s Fed announcement and dot plot.  Before the weekend, the two leading hawks, St. Louis Fed President Bullard, and the former head of the St. Louis Fed’s research department and now Governor Waller, spoke.  Bullard was the only dissent, and some observers were disappointed that Waller did not join his former boss.  Today, the focus turns back to Powell who will speak at the annual NABE conference (noon ET) after Atlanta Fed President Bostic speaks at the same conference earlier (8:00 am ET).  The economic data highlights this week include the new home sales and durable goods orders, and the preliminary PMI.  For those looking further ahead on April 1 the March employment report will be released.  The early forecasts look for around a 450k increase after February’s 678k increase.  Average hourly earnings are expected to rise to 5.5% from 5.1%.

A railroad strike in Canada threatens to aggravate supply chain disruptions. Some 3000 employees of the Canadian Pacific Railway went on strike roughly at the same time that they were locked out.  Negotiations over compensation, benefits, and pensions have been taking place since last September. Labor relations are strained in this sector.  Reports suggest that in eight of the last nine contract negotiations, federal mediators were necessary. Federal mediation is continuing. The Trudeau government is facing pressure to legislate the end of the strike, but at least for now, is signaling some patience to work out a negotiated settlement.

Thursday is an important day for Mexico.  It will see the bi-weekly CPI report for the first half of March.  The headline rate may stabilize around 7.34%, while the core rate may rise a little from 6.67%.  It also will report January retail sales, which may be too dated to have much impact, but in any event, are expected to have recovered from December’s 0.4% decline.  The highlight is the central bank meeting that day.  It is expected to deliver its third consecutive 50 bp increase in the overnight rate, which will bring it to 6.50%.  There is a greater chance of a 75 bp move than a 25 bp hike.  The swaps market has 185 bp of tightening discounted over the next six months.

The US dollar is finding support a little below CAD1.2600. The momentum indicators are still headed lower, but the market seems hesitant with the greenback flirting with levels not seen since late January. The CAD1.2620-CAD1.2640 area offers a nearby cap.The greenback finished last week at new lows for the month (~MXN20.3580). It fell 2.65% last week, its largest decline since early last December. We anticipate a consolidative phase over the next few days. The next chart support is seen near MXN20.30.

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