Calmer Markets to Start the New Week

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Marc Chandler
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Overview: There did not appear to be any negative surprises over the weekend, and this is helping calm investors' nerves at the start of the new week. Deutsche Bank shares have recovered most of the pre-weekend loss in the German market, and Stoxx bank index is posting a gain for the first time in four sessions. The AT1 ETF is slightly softer. In Japan, the Topix bank index slipped around 0.5%, its fourth decline in the past five sessions. Asia Pacific equities were mixed. China, Hong Kong, Taiwan, and South Korean markets fell, while Japan, Australia, and India rose. Europe's Stoxx 600 is up nearly 1% after losing about 1.5% in the previous two sessions. US equity futures are trading with a firmer bias. Benchmark 10-year yields are jumping back. The 10-year US Treasury is seven basis points higher near 3.45%, while European yield are mostly 6-10 bp higher, and the peripheral premium is smaller.

The US dollar is mostly lower in subdued turnover. The Swiss franc and sterling are leading the G10 currencies higher. The New Zealand dollar, Japanese yen, and Norwegian krone are softer. Emerging market currencies are mixed. The Mexican peso continues to recover from the risk-off losses and after the Russian rouble is the strongest among the emerging market currencies today. The South African rand leads the decliners with a nearly 0.9% pullback. Rising rates has tarnished gold. After briefly trading above $2000 before the weekend it has been sold to about $1953 today and looks poised to test last week's lows near $1935.  A push beyond that would weaken the technical outlook. May WTI is trading quietly as it straddles the $70 area.

Asia Pacific

While identifying China as one of the "green shoots" in the world economy, the IMF's Managing Director Georgieva urged Beijing to strengthen consumption. The IMF forecast China to grow by about 5.2% this year, which would account for around a third of the world's growth. Conventional thinking has long criticized China for under-consumption. Georgieva argued that shifting away from investment and toward consumption is more durable, less reliant on debt, and will help address climate change. The idea is that households must have high savings because of the weak social safety net. This means boosting health and unemployment insurance. This would not be the first time Beijing hears this. However, Xi, like some in the US and Europe, has been critical of welfare, for "contributing to laziness."  Georgieva estimated that a balancing of the Chinese economy could lead to a 15% reduction in global CO2 emissions over the next 30 years, which would translate in to a 4.5% global reduction. 

Separately, China reported a nearly 23% drop in industrial profits in the Jan-Feb period from a year ago. Recall that last year, industrial profits fell by 4%. Private firms saw a large decline in profitability than state-owned enterprises (19.9% vs. 17.5%). Profits at foreign firms collapsed by 35.7% after a 9.5% decline in 2022. Earlier reports showed that Chinese output rose in Jan-Feb 2.4%. However, high costs apparently could not be passed through as demand had not fully recovered. 

Japan's Topix Bank Index has fallen by around 17% since recorded a five-year high on March 9, including today's 0.5% loss. The index had rallied a little more than 14% from the start of the year through that early March high. Japan's regional banks were seen as comorbidity. Their income has been in a long-term decline, and they have been large buyers of low-yielding bonds, with collectively around half of the nation's deposits. Japanese regulators say that Japanese banks have higher capital and liquidity requirement than SVB and a loss of their deposit franchise and cancellation of policies at lifer insurers is low. In addition to long-term government bonds, Also, Japanese regional banks reportedly have large unrealized gains from their equity holdings.

Rising US yields helped lift the dollar back above JPY131.00 after it fell below JPY130 before the weekend for the first time since mid-February. The greenback reached around JPY131.35, to meet a retracement objective of the decline from last week's high (~JPY133.00), which can be retested in the coming days. Support now is around JPY130.50. The Australian dollar is trading quietly within the pre-weekend range. It is little changed near $0.6650. It has spent most of the session thus far between $0.6640 and $0.6660. A move above $0.6700 would help lift the tone, but last week saw good offers in the $0.67050 area, where options for about A$650 mln expire tomorrow. The greenback traded higher against the Chinese yuan for the second consecutive session. Last week's low was near CNY6.8170 and today it reached CNY6.8870. Last week's high was around CNY6.8935, and the 20-day moving average is closer to CNY6.8990. Recall that China's lower reserve requirement is effective as of today, helping to ease short-term rates. The dollar's reference rate was set at CNY6.8714 (the median in Bloomberg's survey was CNY6.8711).

Europe

French President's Macron's decision to push through the controversial pension reform without a vote in parliament appears to have escalated protests and more are planned for tomorrow. Separately, the government's decision to construct water reservoirs in in western France to aid farmers sparked violent demonstrations on another front. The construction of at 16 reservoirs are planned. Local communities argue that the water is a common good and agriculture should be encouraged to reduce water-consumption and adopt more sustainable agriculture practices.

The German government coalition is showing strains. Last year, maybe it was the war in Ukraine and the "honeymoon" after the election that constrained the inevitable tensions. But now, they have begun impacting policy. Finance Minister Linder, from the FDP, is committed to the debt-break, which means blocking a 12 bln euro child allowance program and an effort to boost defense spending, for example. He is antagonizing their coalition partner, the Greens, by resisting efforts to boost taxes on higher incomes and ban environmentally harmful perks, like company cars. Meanwhile, the EU is split over whether nuclear energy should be considered a renewable energy source. Germany has argued that nuclear may help such as the production of hydrogen but is not itself on par with wind and solar, for example. Austria and Luxembourg are in broad agreement. France takes the other side, as does Poland. German looks likely to win the debate about allowing the sales of internal combustion engine vehicles after 2035, providing they use carbon-neutral e-fuels and mechanically are prevented from using fuels that generate CO2 emissions.

The euro is trading in about a fifth of a cent range on either side of $1.0765. The range before the weekend was about $1.1715 to $1.0840. The intraday momentum indicators suggest that barring a new development, continued range trading today in North America is likely. Today's high has been 1/100 of a cent shy of the $1.0785 level, where options for 750 mln euro expire today. Sterling is also trading inside its pre-weekend range and has been confined to about half-of-a-cent range today (~$1.2215-$1.2265). The GBP635 mln options that expire at $1.2300 today seem too far away. Sterling has risen in three of the past four weeks. After the yen (3.6%) and the Swiss franc (2.7%), sterling is the third best G10 currency this month (2%).

America

Congressional hearings will be beginning this week on the failure of Silicon Valley Bank and Signature Bank. Some observers are hoping that the Fed's monetary policy will be part of the focus. This camp believes that the Fed's aggressive tightening of monetary policy was critical force here. Rising rates do pose a challenge to bond holders. The Fed's forward guidance had encouraged the view of low rates for longer, but that changed in September 2021. Officials indicated that earlier forward guidance was no longer operative and that the punchbowl would be taken away. The Fed's first rate hike was not delivered until March 2022. By the time the Fed hiked, the 10-year US yield had already climbed from around 1.30% to 2.0%. In 2019, media reports note that the Fed alerted SVB to problems with risk controls. Last summer, regulators warned about issues with liquidity, risk management, and governance. This is to say, SVB's challenges apparently pre-dated the Fed's pivot toward sharply higher rates. 

There are no fewer than eight Fed officials who speak publicly this week, including the Vice Chair for Regulation Barr before the Senate Banking Committee (March 28) and the House Financial Services Committee (March 29). Dobbeck, the head of the NY Fed's Supervision speaks earlier than Barr's testimony on March 29. In terms of FOMC voters, Governor Jefferson speaks today at 5:00 pm ET and will address monetary policy. Governors Waller and Cook talk after the markets close on March 31. There were four officials who last week thought it would be appropriate for the Fed funds target to be over 5.5% at the end of this year. We know Bullard was one. Governor Waller was likely one too. Kashkari may have been the third, even though his comment over the weekend recognized that the bank stress increased the risk of recessions. He said it was too early to judge the impact on the economy and monetary policy. The fourth one is a tougher call. NY Fed President Williams speaks late in the session on Friday too. Richmond Fed President Barkin and Boston Fed Collins speak on March 30 at separate events at the same time (12:45 ET). Despite what appears to be the most diverse Fed ever, it has been amazing the few dissents that have materialized not just as the last meeting but with few exceptions, the Covid reaction and the pivot toward higher rates and QT.

The US dollar is trading at the lower end of last Friday's range against the Canadian dollar. It has traded in a range of roughly CAD1.3720 to CAD1.3745 so far today. A close below CAD1.3710, where the 20-day moving average encourage ideas that the near-term high was set before the weekend near CAD1.3800. Mexico reports February trade figures today. There is a significant seasonal component, and the trade balance has improved in February for the past 16 years without failure. The January trade deficit of $4.13 bln is likely to have been followed by a trade surplus (the median forecast is for a nearly $1.1 bln surplus). The dollar is trading near last week's low (~MXN18.38). Banxico is expected to match the Fed's quarter-point hike later this week and underscores the attractiveness of the carry. The next target is the MXN18.21-24 area.