Yields were surging. Canada and Australia's two-year yields have jumped 20 bp, with the US yield up 10 bp to 2.37% ahead of the $50 bln sale later today. The US 10-year yield rose a more modest three basis points to 2.50%, flattening the 2-10-year yield curve. The 5–30-year curve inverted for the first time since 2016. European 10-year benchmark yields rose 3-7 bp.
Tech stocks helped power the Hang Seng and Australia eked out a small gain, but most equity markets in the Asia Pacific region sold off for third consecutive session. Led by financials, utilities, and communication, the Stoxx 600 rose by about 0.75% in the European morning. US futures were trading with a heavier bias.
The greenback was firm, with the Japanese yen again under the most pressure. It was trading briefly above JPY125 in late morning activity in Europe, before pulling back. The Australian dollar was the only major currency higher on the day. Emerging market currencies were mostly lower. The South Korean won, and Thai baht were hardest hit alongside the Polish zloty.
The jump in yields took some shine off gold, which reached $1966 last week. It was straddling the $1930 area. The $1900 area may offer important support. The lockdown in Shanghai was sparking concerns about oil demand. May WTI was off almost 4% after last week's 10.5% rally. There was also speculation (hope) that OPEC+ will agree to boost output at this week's meeting.
US natural gas prices were little changed after rising in every session last week. Europe's benchmark rose by a little more than 8% today after falling 2.4% last week. Iron ore was a little firmer, while copper was falling for the third session in a row. May wheat was offered, giving back 2.4% after last week's 3.6% a rally.
Asia Pacific
The Bank of Japan entered the market to reinforce the 0.25% cap of the 10-year yield. Its first offer to buy an unlimited amount of bonds failed to draw any interest. The second attempt had to buy JPY64.5 bln (~$525 mln). The BOJ recognized it was engaged in a struggle now and pre-announced that it will be there for the next three sessions. Separately, we noted that according to the latest Nikkei poll, support for Prime Minister Kishida had risen six percentage points to 61%, with high marks given for handling the Russia's invasion of Ukraine.
On the one hand, China rejected the sanction regime against Russia, it said, because it was being imposed with a UN resolution. On the other hand, reports suggested that Beijing and mainland companies were asking US officials for clarification with the idea in mind to understand what was permitted. China and India purchases, for example, of Russian oil were not violating the sanctions.
There was thought that China would abandon its strict zero-COVID course. Some suggested that the easing of restrictions in Hong Kong could be a prelude to a change by Beijing. However, that did not appear to be the case. Yesterday, Beijing announced a lockdown of Shanghai, China's largest city (population estimated around 25 mln).
The eastern half of city will be locked down for four days starting today. This covered the financial district. The purpose was mass testing. The western half of the city will be locked down as of Apr. 1. Residents will be barred from leaving home and public transportation and ride-hailing services will be halted. A record 5500 cases were said to have been reported on Saturday. Recall that earlier this month, Shenzhen, an important tech hub was locked down.
China was taking a new initiative though that has not been widely reported. It appeared that China and the Solomon Islands were close to a security pact. The leaked documents suggested that the pact could lead to a Chinese military presence there. Solomon Islands did not confirm the leaked details but did acknowledge that it was broadening out its security arrangements and China would be included in the changes.
This was a blow to Australia, which had seemingly secured the strategically located country into the Western alliance. Solomon Islands had abandoned Huawei in 2018 and struck an agreement with Australia to build a 2500-mile internet cable to it.
Last year, Australia sent some police to help quell riots in Honiara, the capital of the Solomon Islands, over economic problems, and anti-Chinese sentiment. Yet, China had been making inroads. For example, in 2019, Honiara dropped its recognition of Taiwan. The US has acted belatedly. Its embassy was closed in 1993 and not re-opened until last month. As the map here shows, a Chinese presence in the Solomon Islands would compromise Australia's security.
The BOJ's defense of its Yield Curve Control policy in the face of surging global yields and especially US rates kept the yen on the defensive. The yen edged higher at the end of last week for the first time in six sessions, but its losses accelerated today. As we have noted the last significant high was in 2015 and then the greenback reached about JPY125.85. The notable high before that was in 2002, a little above JPY135.
The Australian dollar was firm. It posted a marginal new five-month high near $0.7540. It was approaching last October's high by $0.7550. It was the fifth consecutive advance, if sustained, and it would be the ninth gain in the past 10 sessions. The positive terms-of-trade shock seemed to the be chief driver. A pre-election due first thing Wednesday in Canberra was expected to include a cut in the fuel tax for six months, support for first-time home buyers, and boost funds for roads and rails. The election was expected to be called by late May.
The greenback gapped higher against the Chinese yuan, reaching a little more than CNY6.3810, but subsequently trended lower to fill the nearly fill the gap (the pre-weekend high) by CNY6.3680. The PBOC's reference rate for the dollar was lower than the Bloomberg survey anticipated (CNY6.3732 vs. CNY6.3740).
Europe
In an unexpected turn of events, Germany's Economic Minister Habeck, a member of the Green Party, suggested that he was open to re-examining the decision to close the county's remaining three nuclear plants later this year. Previously, the Greens and Habeck ruled out this option. Still, the surge in energy prices and the belated efforts to reduce its dependence on Russia was pushing the pragmatic Greens (realos) in this direction. Merkel's push to close the nuclear energy plants after Japan's nuclear accident in 2011 resulted in increased reliance on Russia and spurred the Nord Stream 2 pipeline.
Among the scenarios that were bandied about before Russia's invasion of Ukraine was that it could pursue a limited objective of securing the entire regional claims over Donetsk and Luhansk. Since the war began, Western sources have played up a different scenario—one of total occupation of Ukraine. The narrative it was telling now was that after having suffered some significant setbacks, for which the higher range of estimates suggested Russia had lost as many soldiers (15k) in Ukraine as it did in 10 years in Afghanistan.
Russia admits to less than a tenth of those estimated deaths in Ukraine. Even taking into account the number of injuries inflicted, the lower number of NATO's range (7k). It was quite clear that both sides had it in their interest to, shall we say, see what they want. Still, the point now was that Russia's 1st Deputy General of the Chief of Staff suggested Russian forces would focus on gaining the full control of the Luhansk, which it may be nearly there, and Donetsk, which was thought to be a little more than half secured. The idea was that when the territory was militarily secured, a referendum would be held to formally join Russia. Strategically, a land-bridge to Crimea would also be secured.
The euro was sold to an eight-day low near $1.0945 after holding above $1.0960 last week. It popped up in early European turnover to the session of just below $1.10. That was an important level in the coming days, with large options expiring there. The nearly 585 mln euro expiry today was the smallest. Tomorrow's expiring options were for almost 2.5 bln euros and the same Wednesday ahead of Thursday's nearly 2.9 bln euro expirations. If the upside was blocked, look for a test on $1.09 and below there was this month's low slightly ahead of $1.08.
Sterling was testing last week's low by $1.3120. A break targeted the $1.3070 area, and possibly $1.30, which was seen in the middle of the month. It last traded below there in late 2020, when it found a base around $1.2880.
America
The US Treasury indicated that Russia could use frozen funds to make debt payments until May 25. Next Monday, there is a $2.2 bln debt servicing payment due. Some covenants would allow for the ruble payments, but these reportedly do not. After May 25, Russia needs to raise money in other ways, including selling its oil and gas.
Over the weekend, President Biden implied relations with Russia cannot be normalized while Putin was in control. It was later walked back by Secretary of State Blinken. However, within the US, claiming Putin was a war criminal, it was hard not to conclude that the US seeks regime change. Some might find the US assertion of war crimes more powerful and compelling if Washington or Moscow were signatory members of the International Court of Justice. If you were keeping records of such things, Beijing was not a member either. The ICJ does not have authority over non-members.
President Biden has been struggling in the polls. His support was around 40%, near the levels that Trump experienced at the same time of his presidency. One poll found that some 70% had little confidence in his handling of Russia and the war. This suggested that his base had also softened. Meanwhile, Biden was expected to unveil new budget proposals, which will include record spending for "peace" time. He was expected to formally endorse the previous Senate Democrat proposal for a "billionaires' tax" that would be extended to unrealized gains. It is said to raise $360 bln over the next 10 years.
At the same time, without the COVID-related spending and income replacements, the budget deficit will be projected to fall. The median forecast in Bloomberg's survey had the budget deficit falling to 5.1% of GDP this year form 10.8% last. Lastly, there seemed to be a misunderstanding about trend growth in the US. Some observers talked about a growth recession as the most likely or best outcome that can be anticipated. Yet the 2% pace or so bandied about could hardly be called a "growth recession" because for the Fed, this would simply be a return to trend growth. The Fed estimated that the long-term growth rate is 1.8%-2.0%.
On tap today was the US February advanced goods trade balance. It was a record deficit in January. Wholesale and retail inventories were also due. Retail inventories rose by an average of 2.3% a month in Q4 21. They were expected to have risen by about 1.4% after January's 1.9% increase. Wholesale inventories rose by an average of 2.2% in Q4 21. They were rising at about half that pace in the first two months of Q1 22. We have noted that the inventory cycle was maturing, and it will not provide the tailwind as it did previously, and especially in Q4 21. The Dallas manufacturing survey was expected to have softened a little.
The US dollar had a nine-day drop in tow against the Canadian dollar coming into today's session. It was pinned near the pre-weekend low around CAD1.2465. It was not above CAD1.2505 today. We anticipated some near-term consolidation that could see the greenback trade toward CAD1.2520-CAD1.2540.
The US dollar was poised to snap an 11-day slide against the Mexican peso. During that run, the greenback fell from around MXN21.06 to about MXN19.91. It was up to MXN20.12 today and since then it had found support ahead of MXN20.00. We suspected near-term potential extended into the MXN20.20-MXN20.22 area.