Summary: Equity markets managed to stick the landing on Friday after an exuberant rally off cycle lows in most markets. The S&P 500 Index is even interacting with its 200-day moving average, even with no end in sight to the war in Ukraine helping to take crude oil prices significantly back higher and some Fed rhetoric turning even more hawkish. After the major bounce last week, this week looks pivotal for whether this represents a significant shift or whether markets will continue to fret that the recent shocks will set the global economy and corporate profits on the path to recession.
What is our trading focus?
In Asia, Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) consolidated and gave back some of the gains from last week’s dramatic reversal. Hang Seng Index fell almost 1% and CSI 300 was off 0.7% at the time of writing. Meituan (03690) and Baidu (09888) fell about 5%. Chinese banks kept their 1-year and 5-year Loan Prime Rates (LPR) unchanged this morning on their monthly fixing announcement. Semiconductors did relatively well. SMIC (00981) was up more than 2%. Hua Hong (01347) were up over 6% after announcing the company’s plan to issue A shares at the Shanghai Stock Exchange. Coal miners outperformed. China Coal (01898) rose more than 3%. While mainland Chinese catering stocks were hit, Hong Kong catering stocks rallied 4% to 7% as the city is relaxing its anti-COVID measures. Hong Kong lifted its ban on flights from Australia, Britain, Canada, France, India, Nepal, Pakistan, Philippines and the United States effective from April 1. Cathay Pacific (00293) rose 1.2%.
EURUSD – made a bid at a bullish reversal late last week by trading into the key 1.1100-50 area, but this effort was not held Friday, perhaps as US yield rises continue to outpace those of Europe after the two most prominent ECB officials, President Lagarde and Chief Economist Lane, said on Friday that a Q4 lift-off for rates seemed likely, while at least one Fed official was arguing in an interview for multiple 50-basis point our higher rate hikes at coming meetings (more below). That upside zone remains key if bulls are to get the upper hand, while the downside range extends all the way to the 1.0800 area. Headline risk from the war in Ukraine remains an important factor for the euro.
AUDUSD – the pair is back near the highs for the year, just above 0.7400, after a sharp rally last week, a week that included a strong rally in Chinese markets from new cycle lows after the Chinese government offered a strong message of support for the economy and domestic markets. As well, risk sentiment stabilized last week and commodities bounced back after a sell-off, bringing the Aussie some additional support (its trade balance is reaching record surpluses on its formidable portfolio of commodity exports). The one cylinder not firing for the Aussie is the RBA, which remains cautious on signaling the pace of rate increases that other central banks like the FEd appear intent on carrying out this year, although the market has priced the RBA to begin lifting off this summer and beginning to reduce the gap by late this year. Technically, this 0.7400 area is important for whether AUDUSD will remain capped or proceed to the next resistance, the pivotal 0.7550 area. Commodity prices and risk sentiment are the critical background factors for the Aussie.
Crude oil (OILUKMAY22 & OILUSAPR22) rose to a one-week high in Asia as the war in Ukraine keeps global supplies very tight with traders, mostly through self-sanctioning, avoiding Russian crude, currently being offered close to 30-dollar below Brent with a limited number of buyers queuing up to secure cheap cargoes. In addition, Middle East tensions also rose after Houthi rebels attacked sites across Saudia Arabia over the weekend. With supply tightening, the market will be looking for signs of demand destruction, mostly through the cost of diesel and gasoline as well as the impact of temporary covid related lockdowns in China.
Gold (XAUUSD) & silver (XAGUSD) trade steady as investors continue to weigh monetary policy tightening in the US against the inflationary impact of the Russia-Ukraine war. Long liquidation from leveraged funds who had loaded up on gold futures in recent weeks may have run its course, while longer-term focused investors have been continuing buyers of gold ETFs since the war began. During this time, total holdings have jumped by 134 tons to a one-year high at 3,246 tons, with more than half of the increase seen during golds recent 175-dollar correction. Gold as being bought as a hedge against elevated inflation and a central bank policy mistake with slowing growth potentially preventing the FOMC from carrying out its planned number of rate hikes before being forced to revert to a period of renewed stimulus. Key support at $1890/oz with a break above $1957 needed to signal fresh upside potential
US Treasuries (IEF, TLT). The yield curve is close to inverting between 5 and 10-years, signaling that the market is fearing an upcoming recession spurring from an aggressive Fed’s hiking agenda. In the meanwhile, two-year yields found strong resistance at 2%. This week, the focus is going to be on Fed’s speakers starting today with Jerome Powell speaking about the economic outlook. The US Treasury is going to sell 2 and 20-year bonds on Wednesday and 10-TIPS on Thursday. In terms of data, investors are going to pay attention to manufacturing PMI data.
What is going on?
Aluminum jumps 5% and another limit down day in nickel, perhaps: The industrial metal markets remain challenged by the war in Ukraine and sanctions against Russia. Nickel traded on the London Metal Exchange has been limit down since re-opening last Tuesday, and even with today’s extended 15% down limit, it may still not open after nickel futures in Shanghai slumped 11% overnight. Aluminum futures meanwhile trades up by 4.5% after Australia imposed a ban on alumina to Russia, and while the so-called everywhere metal has not been targeted by sanctions, Russian producers will now face disruptions as alumina and bauxite are the main feedstocks needed to produce aluminum.
Virtually all of the Fed has turned hawkish, wanting at least one 50-basis point hike and soon, while we also know that the Fed wants to reduce its balance sheet size at a more rapid pace than during the 2017-19 cycle. Joining the chorus for larger rate hikes was Christopher Waller of the Fed Board of Governors on Friday, who argued for a “front-loading” of rate hikes to move against “raging” inflation. He favours a 50-basis rate hikes or higher at “one or multiple meetings in the near future”. Even the traditionally most dovish of Fed members (but a non-voter this year), the Minneapolis Fed’s Neel Kashkari, argues that the Fed funds rate should be 1.75%-2.00% by the end of this year (about where the market is expecting it to be).
Housing affordability continues to be a challenge in the United States. Existing-home sales faded 7.2 % month-over-month in February (seasonally adjusted annual rate of 6.02 million). At the same time, the inventory of unsold existing homes slightly increased to 870,000. This is equivalent to 1.7 months of supply at the current monthly sales pace. Finally, existing-home sales prices continue to jump (+15 % year-over-year to $357,300 on average). Buyers are facing increased difficulties resulting both from rising mortgage rates and sustained prices increases. For instance, buyers who managed to get a 3 % mortgage rate are no longer able to buy at the 4 % rate. This is becoming a serious social issue in the United States.
MHP is the first Ukrainian corporate bond to default on a coupon payment. The company produces poultry, grain, and meat. It announced that, due to the war, it would miss $11mil worth in interest payments on dollar bonds. The coupon was to be paid on the 19th of March.
Venezuela Bonds are surging on speculations over a US deal. Venezuelan bonds rose from 6 cents on the dollar a couple of weeks ago to 10 cents on the dollar last week, as investors believe that chances for a US deal are rising.
What are we watching next?
Developments in war in Ukraine: US President Biden to talk with major European leaders today to discuss a coordinated response to the war in Ukraine. Today, Ukraine refused to surrender to Russia in the besieged Ukrainian port city Mariupol. Biden will also meet with executives of oil major Exxon and the US’ largest bank JPMorgan and other companies about the impact of sanctions. Turkey continues to host talks between Russia and Ukraine and the Turkish foreign minister claimed that the two sides are moving closer to an agreement that would enable a cease-fire.
Fed Chair Powell out speaking today at a conference with Q&A – will he also express interest in hiking rates 50 basis points or give an additional sense of urgency after the FOMC meeting last week? The market is pricing either the next meeting on May 4 to bring the larger rate hike or the June Meeting to do so, with uncertainty on whether the Fed would be willing to both deliver the largest rate hike in 20 years and to start balance sheet reduction at the same meeting (which is expected soon after the March 16 FOMC statement said QT would begin “at a coming meeting.”
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Economic calendar highlights for today (times GMT)
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