Russia's formal recognition of the two separatist regions in eastern Ukraine kicked out the legs upon which hope of a diplomatic solution stood. Putin's decision to send in troops into the regions was seen the start of the war. The US, UK, and EU were preparing sanctions. As one might expect, global equities fell, and bond yields have edged lower.
The large equity markets in the Asia Pacific region were off more than 1%. Europe's Stoxx 600 gapped lower and subsequently filled the gap, and was trying to snap a three-day slide. S&P futures recouped most of their earlier declines, while NASDAQ futures were off about 0.4%.
The US 10-year yield was off slightly near 1.93% after earlier slipping below 1.90%. Most European benchmarks were narrowly mixed. The foreign exchange market reaction was somewhat counter-intuitive. The Scandis and Antipodeans led the major currencies higher. The Japanese yen, Swiss franc, and sterling were nursing modest losses.
Among emerging markets, central European currencies were posting small gains, while most of the freely accessible currencies were weaker. The JP Morgan Emerging Market Currency Index was recovering from initial losses after posting small declines over the past two sessions.
Gold rallied to new highs, a bit above $1914 but sold-off to almost $1895 in early European turnover where new bids emerged. Crude oil jumped on the news and the April WTI contract neared $95. It was near $94 after finishing last week a little above $90. Natural gas prices have risen as well. The US contract was up about 4.0%, while Europe's benchmark rose by around 7.5%. Iron ore fell by 2% after advancing 5% yesterday, and copper was heavy for a third session.
Asia Pacific
Beijing's new regulatory checks on links to Ant was taking a toll on tech shares in China and Hong Kong. Its efforts in coal and steel were seen boosting lending as well. The surge in lending appeared to have taken some of the urgency seen for more rate cuts. Four large banks in Guangzhou, home of Evergrande (HK:3333), announced cuts in mortgage rates yesterday.
Still, the soft CPI and next week's February PMI, where more weakness is expected may fan expectations. Moreover, while the US and Europe lift COVID-related restrictions, Hong Kong and China appeared to be moving in the opposite direction. While China was in favor of checks on NATO, the recognition of separatist forces tended not to find much favor in Beijing, which was wary of such ploys being used against it.
New record fatality tolls in Japan, and the delayed booster rollout undermining support for Japan's cabinet. The latest poll showed an 8.3 percentage point slide to 43.4%. Approval of the Kishida government's handling of the pandemic fell 6.3 percentage points to 38.9%, just above the disapproval rating of 37.9%. Recall that last week, the government lowered its overall economic assessment for the first time in five months. The extended social restrictions were due to end Mar. 1. An upper house election will be held in July, and it could determine the political future of Kishida.
The US dollar found support in early Asia near JPY114.50, its lowest level in almost three weeks. It recovered to about JPY114.90. Still, if it cannot trade above about JPY115.15, it will be the fifth session of lower highs. There were $1.8 bln in options at JPY115.20-JPY115.25 today. Falling equities, lower yields, and the uncertainty over Russia's intentions could see JPY114.20 on a break of JPY114.50 today.
The Australian dollar was firm above $0.7200, but below the highs from the past two sessions around $0.7225. The intraday momentum indicators warned that the upside may be limited now. Note that despite several efforts, it was unable to settle above $0.7200 this month. There was a A$1.7 bln option that expires there today.
The US dollar rose to almost CNY6.3450, its highest level in a week, before reversing lower and falling back toward CNY6.3330. As seen in four sessions last week, the PBOC set the dollar's reference rate slightly weaker than expected (Bloomberg survey) at CNY6.3487 vs CNY6.3489.
Europe
Russia formally recognized the two separatist regions in east Ukraine that it had fostered if not made of whole cloth. Putin proceeded to send Russian forces into the regions. It is not yet clear whether he intends on taking the troops to the border with Ukraine forces. Note that large parts of those regions, Donetsk and Luhansk are still controlled by Kyiv. The tactics seemed broadly similar to Russia's 2008 operations in Georgia and the recognition of Abkhazia and South Ossetia. The US, EU, and UK were preparing sanctions.
Germany's February IFO survey was better than expected. The current assessment improved to 98.6 from 96.2. It was the first increase in six months. The expectations component rose to 99.2 from 95.8. It was the second consecutive improvement and was at its best level since last July. The net effect was to lift the overall business climate reading to 98.9 from 96.0. It reached a 10-month low in December, a little below 95.0. This seemed consistent with the recovery in the preliminary composite PMI reported yesterday of 56.2, indicating Europe's largest economy was recovering from the soft patch in Q4. In December, the composite PMI had slipped slightly below the 50 boom/bust level.
The euro initially approached last week's low (~$1.1280) but rebounded smartly and was make new session highs in late morning turnover in Europe near $1.1345. There were options for 780 mln euro at $1.1330 and another 455 mln euros at $1.1350 that expire today. The intraday momentum indicators were getting stretched.
Sterling managed to close above $1.36 yesterday, for only the second time since January 19, but was sold in late Asia to almost $1.3550. It rebounded in early European turnover to almost $1.3600. A consolidative North American session may be the most likely scenario. The euro was snapping a four-day slide against sterling that took it to almost GBP0.8300. A close above GBP0.8355-GBP0.8360 would be a constructive technical development.
America
The geopolitical developments were front and center today in terms of talking points, even if the foreign exchange market reaction was surprising. The economic calendar was jammed with house prices, the preliminary February PMI and the Conference Board's consumer confidence survey. The Richmond's Fed manufacturing survey is also due.
The market may be most sensitive to the PMI but even that was unlikely to have much impact today. Expectations for Q1 GDP appeared to be solidifying around 1.3%-1.6% annualized pace. A small upward revision was expected in Q4 21 GDP later this week. The Fed's Bowman spoke yesterday and held out the possibility of a 50 bp hike next month if inflation comes in "too high" (whatever that means with CPI at 7.5% and the PCE deflator likely to rise to 6%—to be reported at the end of the week). The odds of a 50 bp move rose to almost 32% from about 25% before the weekend.
Canada's Prime Minister Trudeau will retain emergency powers for a few more days even after the protests had been cleared from downtown Ottawa and border crossings were re-opened. The economic impact not seen as something that will derail the Bank of Canada from beginning its tightening cycle next week. The central bank meets on Mar. 2. The swaps market had a little more than a 55% chance of a 50 bp hike discounted. At the end of last month, slightly more than a 20% chance was seen.
The US dollar reached a five-day high near CAD1.2770 in reaction to the Russian news but was sold in the European morning to almost CAD1.2725. Yesterday's low was about CAD1.2720. It probably takes a break of CAD1.27, where a $1.23 bln option expires later today, to signal anything of interest. The lower end of this month's range was in the CAD1.2650-CAD1.2660 area.
Mexico and Brazil had light economic calendars today. The greenback rose above its 200-day moving average against the peso (~MXN20.3475) for the first time in four sessions. It came back offered to straddle the MXN20.30 area in late morning European dealings. Yesterday's low was slightly below MXN20.25 and last week's low was by MXN20.2360. We suspected support in the MXN20.26-MXN20.28 may limit the downside today.
Many asset managers continued to extend Brazilian exposure. The dollar fell to almost BRL5.0750 yesterday, its lowest level since last July. Yesterday's high near BRL5.1550 may offer a nearby cap.