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Investors Fear Market Meltdown

By Marc ChandlerForexJan 25, 2022 06:39AM ET
Investors Fear Market Meltdown
By Marc Chandler   |  Jan 25, 2022 06:39AM ET
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The stunning upside reversal in US stocks was not sustained. The NASDAQ futures were off around 1.7% and the S&P 500 futures were nearly 1.2% lower. Asian equities were hit hard, with China, Korea, and Australia off more than 2%.

Singapore unexpectedly tightened monetary policy (through the exchange rate) and the local stocks were off 1.3%. Europe's Stoxx 600 was up about 0.7%, led by energy and financials.

Bond markets were drawing little support. The US 10-year yield was up to almost 1.79% after testing 1.70% yesterday. European yields were mostly 2-4 bp higher, and the periphery was holding in better than the core.

The dollar was firm, though the Australian and Canadian dollars were the most resilient. Among emerging market currencies, the Russian ruble was a little higher after the central bank indicated yesterday it would hold off its forex operations tied to managing its oil proceeds that involved buying foreign currencies. The Singapore dollar also edged higher. The Chinese yuan ticked up even though bonds and stocks weakened. The JP Morgan Emerging Market Currency Index was off for the third day, the longest losing streak this year.

Gold was slipping lower in the European morning. March WTI was trading firmly around $84 after falling more than 2% yesterday. US natural gas was off around 2.4% after rallying almost 6% in the past two sessions. European natgas was slightly lower, and was consolidating near the three-day 25% surge. Iron ore fully recouped yesterday's 3% decline and copper steadied after falling almost 4% in the past two sessions.

Asia Pacific

Australia's Q4 CPI was higher than expected. The key take away was to boost the market's confidence that the central bank will have to capitulate and raise rates considerably earlier than it has indicated. The Reserve Bank of Australia meets early next week. The market moved to discount a greater likelihood of a June move. The quarterly pace of inflation rose to 1.3% from 0.8% and lifted the year-over-year rate to 3.5% from 3.0%. The underlying measures also rose more than expected.

The Monetary Authority of Singapore, which uses the exchange rate as its main monetary policy tool, unexpectedly (between meetings) raised the path slightly of the Singapore dollar. The currency adjustment was in response to the one percentage point increase in  headline and core CPI projections. This was seen as a preemptive move, consistent with its move last October.

South Korea's growth accelerated to 1.1% in Q4 from 0.3% in Q3. It was boosted by both exports and consumption (shades of "dual circulation?). The year-over-year pace edged up to 4.1% from 4.0%. 29. The central bank hiked its policy rate 25 bp last month to 1.25%. It hiked twice last year, and the swaps market had 75 bp of tightening discounted this year.

The dollar tested the JY113.50 area yesterday and recovered to JPY114.00. It was probing session highs in the European morning near JPY114.10. There was a $410 mln option at JPY114.35 that expires today. Some position adjustments ahead of tomorrow's FOMC meeting may have been helping the greenback, but the intraday momentum was getting stretched.

The Australian dollar was in the middle of its roughly $0.71-$0.72 range traveled yesterday. The $0.7185-$0.7200 area offered the nearby cap. Here too the intraday momentum indicators cautioned against chasing the market higher now.

Even without a bid from its asset markets, the Chinese yuan edged higher. It was the fifth consecutive advance. To put the yuan’s move this year in perspective, consider it had only fallen against the dollar in four sessions so far. Against its trade-weighted basket, the yuan appeared to be at a record high.

The PBOC set the dollar's reference rate at CNY6.3418, a little firmer than the market expected (Bloomberg median projection) of CNY6.3410. Although some were drawing strategic conclusions about PBOC policy, we thought a clear picture will emerge after the weeklong Lunar New Year holiday that begins next Monday.


On the heels of yesterday's better than expected German flash PMI, the IFO survey was reported today. The overall assessment of the business climate improved more than anticipated to 95.7 from 94.8. This snapped a six-month decline. The improvement came as the number of COVID cases surged. The view of current conditions deteriorated to 96.1 from 96.9. It was the fifth consecutive fall. The improvement came from expectations, perhaps on ideas that things can't get worse. The expectations component rose to 95.2 from 92.7. It was the first increase since last June.

Even before Gray's report on the internal investigation of "partygate" at 10 Downing Street, new reports added pressure to Prime Minister Johnson. :ITV News reported on Johnson's birthday party in mid-2020 during the pandemic restrictions that included at least 30 staff. The report played into the general sense of the Prime Minister whose character was well known.

Gray's report was expected to hold off a formal police investigation, but the London police announced it had opened a probe. Not helping matters, separately, a UK Treasury and Cabinet Office minister (Agnew) resigned ostensibly over the government's record in dealing with fraudulent claims on its COVID business loan program.

The US and NATO were shoring up their defenses in Eastern and Central Asia. This seemed similar to Sweden's recent decision to send troops to the island it controls in the Baltic Sea. The moves seemed defensive in nature. These, like the threats of financial and economic sanctions were well within the playbook that Russia would have anticipated. Therefore, while prudent and cautionary, the military moves were unlikely to offer a powerful deterrent. Meanwhile, the UK defense minister warned the Russian advance troops were already operating in Ukraine.

Hungary was expected to hike its base rate by 30 bp today to 2.70%. It would be the eighth hike in as many months, December CPI reported earlier this month rose 7.4% year-over-year (steady from November). This would set the stage for another hike in the one-week deposit rate on Thursday. The deposit rate had been raised consistently from mid-November (1.80%) to 4% at the end of last year.

The euro dipped below $1.13 yesterday but recovered to $1.1335. It was unable to extend the recovery and new sellers emerged. The lows were being recorded in the European morning near $1.1280. Even though the intraday momentum indicator was overextended, it may be difficult for the euro to resurface above the $1.1300 level quickly as a 1.3 bln euro option expires there today. This month's low was near $1.1270.

Sterling, which we identified as particularly vulnerable in our weekly review of the price action slid almost 0.5% yesterday, its biggest loss this month. It was unable to overcome resistance at $1.35 (a GBP430 mln expiring option were also struck there). and looked poised to return to yesterday's low near $1.3440. A break could signal a test on $1.3400.


US house prices, the Conference Board's consumer confidence, and the Richmond Fed's manufacturing survey wouldn't be the data points that typically moved the market. This seemed doubly true given the stock market's swoon, the conclusion of the FOMC meeting tomorrow, and the geopolitical strains in Europe.

The market has not been dissuaded from expectations of a March rate hike, but has reined in thoughts it could be a 50 bp move. Also, the market has trimmed its aggressiveness about more than four hikes this year, even though one large bank suggested a hike at every meeting starting in March was possible. A week ago, the market was discounting about a one-in-five chance of a fifth hike. Now a little less than four hikes are fully discounted in the Fed Funds futures strip.

The market also pulled back a bit from its expectation of a hike tomorrow by the Bank of Canada. A week ago, the swaps markets had discounted an almost 83% chance of a hike. Now, a little less than 2/3 of a chance has been priced in. Bloomberg's survey of economists seemed broadly split. The median was for unchanged stance, but the average was 36 bp, reflecting the close decision.

Mexico's biweekly CPI was slightly firmer than expected yesterday, and the year-over-year rate slipped to 7.13% from 7.26%. Today, Mexico reports November economic activity index, which is not a market-mover. The central bank does not meet until Feb. 10, and it will do so with a new governor at the helm. The swaps market had about 200 bp of tightening this year discounted. It was leaning to a 35 bp hike after a 50 bp move at the end of last year.

The Canadian dollar suffered in yesterday's risk-off environment, and the greenback surged to CAD1.27 before pulling back along with the equity recovery to settle near CAD1.2640. It was little changed in a tight range 20-pips or so on either side of the close. An option expiring today for about $4235 mln at CAD1.2685 was likely neutralized yesterday. The market may take its cues from equities.

The greenback rose to MXN20.67 yesterday and was near there as the North American market prepares to open. The year's high was set on Jan. 6 close to MXN20.76. Above there, the initial risk was toward MXN20.82.

Investors Fear Market Meltdown

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