Greenback Remains Heavy

Overview: The equity rally appears undeterred by the rise in interest rates or the surge in oil prices. Led by Tokyo and Hong Kong, Asia Pacific equities advanced. China, Taiwan, and Vietnam markets remain closed. After gapping higher yesterday and extended the gains in early turnover today, the Dow Jones Stoxx 600 is consolidating. US shares are trading higher ahead of the re-opening after a long holiday weekend. The US 10-year benchmark yield is near 1.24%, almost nine basis points higher than a week ago. European bond yields are firmer. They appear to be taking their cues from Treasuries. German and French yields are up 6-7 bp over the past week, while the UK benchmark yield is up 11 bp. Italy's 10-year yield has risen about two basis points over the same time. The dollar remains heavy, with the euro pushing above $1.2150 resistance and sterling probing $1.3950. The Australian dollar edged above $0.7800 for the first time in a month. The emerging-market currency complex is mixed, and the JP Morgan index is little changed after a seven-day advance. Gold is trading inside yesterday's (~$1816-$1827 range). Oil prices were lifted by the winter storm in the US that adversely impacted some 5 mln households in the US and nearly as many in Mexico. March WTI approached $61 a barrel before some profit-taking kicked in and pushed it back below $60.

Asia Pacific

Once again, China is reportedly threatening to weaponize its rare earth capacity. Press reports warn that Beijing is mulling curbing rare earths to the US defense sector. China is the source of about 80% of US rare earths, metals, and minerals used in modern technology. Apparently, this is maybe a probing exercise to see if it can frustrate some jet fighters' production like the F-35 and see how quickly the US can find an alternative. What is needed is not just the rare earths but the processing capacity. China has weaponized its rare earths in the past, like against Japan, nearly a decade ago. We had suggested that when this did happen, it was a "Sputnik Moment," but alas, we noted that the vulnerability remained two years ago (here).

Iran is a leading contender as the first foreign policy challenge to the new US administration. Iran is threatening to end the voluntary participation in snap inspections of its nuclear work unless the US lifts sanctions. The Iranian parliament has given President Rouhani until February 21 to halt this type of inspection, but not all inspections. Trump withdrew from the agreement in 2018 and imposed sanctions on Tehran. Biden has expressed interest in rejoining the international agreement, but only if Iran moves back into compliance. Iran is believed to be rolling back its commitments under the agreement, including last month's announcement that it would enrich uranium up to 20%purity, in violation of the treaty. This seems to be a reflection of internal Iranian politics as it is about foreign policy proper. The agreement was President Rouhani's signature accomplishment. His second and last term ends in June. One way to block the path of another moderate from succeeding Rouhani is to escalate tensions with the new administration in Washington and prevent a quick return to the accord. Reports had suggested the Biden administration was considering good-faith gestures, supporting IMF lending to Iran to help combat the virus and other humanitarian aid. The Trump administration imposed terrorist-sanctions on Iran's central bank. This cripples Tehran, and without it being lifted, there is only so much relief that is possible. 

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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