The Fog Of War

Photo by Artur Voznenko on Unsplash

When Russia did what the US has been warning about since February 11, the markets seem to have an exaggerated response. The recovery in the S&P 500 and NASDAQ, the $90 pullback in gold from its highs, a $7 retreat in the price of April WTI, set the tone for today's action. In Asia Pacific, Hong Kong was only market that failed to trade higher today. Europe's Stoxx 600 has rebounded almost 2% after plummeting nearly 3.3% yesterday. Utilities, real estate, and information technology are leading. After an amazing upside reversal yesterday, US futures are around 0.5% lower. The US 10-year yield is hovering near 1.95%, which is around the middle of this week's range. European yields are softer to extend this week's decline of between four (Germany) and 12 basis points (Italy) wcr. Higher than expected Tokyo CPI may have helped lift Japan's 10-year yield back above 0.20%, potentially setting up a test on the upper end of the approved band (0.25%) under Yield Curve Control. The dollar-bloc currencies and yen are pushing higher in the foreign exchange market, while the Scandis and euro are nursing small losses. Among emerging market currencies, the Russian rouble is the strongest, up 2.5% to cut yesterday's loss in half. Central European currencies are weaker, while Mexico, India, South Africa, China are the strongest in the EM space after Russia. The JP Morgan Emerging Market Currency Index is has stabilized after falling 2% of the past two sessions. Gold is firmer after yesterday's wild session. It is poised to close higher for the fourth consecutive week. Recall it settled last month a little below $1800 and has held above $1900 today. April WTI is struggling to advanced after gaining for the past four sessions.. It is near $92.75 after finishing last week a little above $90. It has risen every week except last week since mid-December. US natgas is falling for the second session and near $4.50 is up 1.5% this week after a nearly 12.5% advance last week. Europe's natural gas benchmark gained more than 30% yesterday and is giving around a fifth of that today. Iron ore pared this week's gains to settled up about 2.5% after falling 11% last week. Dr. Copper is threatening to snap five-day drop.

Asia Pacific

Japan is not among the high-income countries struggling with inflation. Do not be misled by the 1% year-over-year rise in Tokyo's February CPI, though it was above expectations (0.7% median forecast in Bloomberg's survey). Economists had underestimated the rise in energy and fresh food prices. Excluding fresh food prices, the headline gain was halved. If fresh food and energy were excluded, consumer prices in Tokyo are 0.6% lower than they were a year ago. Next week, Japan report January retail sales and industrial output figures, which coupled with final February PMI readings, will show the world's third-largest economy is off to a very weak start of the year. Social restrictions will be lifted next month and a recovery in Q2 is expected. 

Many are watching Beijing response to Russia's invasion of Ukraine. It appears to be more critical of NATO than supportive of Russia. The creation of a separatist movement and then using that movement as a pretense for invasion strikes too close to home for Beijing to be comfortable. Russia does not have much support globally and China could use it as an opportunity to bolster its image on the world stage. Press reports suggest oil importers from China, the largest buyers of Russian oil are hesitating and pausing new seaborne purchases. Chinese refiners and traders in the Far East ports seek more clarify on cargo financing and payments. Note that Russia's energy exports were exempt from sanctions, but some banks have begun imposing restrictions on commodity-trade finance. 

After being confined to less than a third of a yen on Wednesday when Japan was on holiday, the greenback covered more a 1.2-yen range yesterday and settled above Wednesday's high. The outside up day, however, did not see any follow-through buying, but for the first time in six sessions, the greenback has held above JPY115.00. Except on exception earlier this month, dollar has been confined to a JPY114-JPY116 range this month. Yesterday's volatility saw the Australian dollar slip below $0.7100. It recovered and today is probing above $0.7200. The RBA meets next week and its push against an early rate hike may ease a bit for a possibly hawkish hold. The market appears to have pushed the first-rate hike out toward August from June/July. The greenback rose by almost 0.25% against the Chinese yuan yesterday and is giving it back today. The PBOC set the dollar's fixing at CNY6.3346, slightly higher than the CNY6.3334 median projection (Bloomberg survey). The trade-weighted index softened a little after hitting a record high yesterday. Note that foreign investors bought a CNY6.4 bln of Chinese equities today, the most in a month. However, banks were reportedly large buyers of dollar in later mainland dealing.


The economic data highlight for the eurozone next week is the preliminary February CPI estimate. France's news today warns that prices have likely accelerated this month. The EU harmonized measure rose by 0.8%. Economists looked for a 0.5% increase. The year-over-year pace jumped to 4.1% from 3.3%. The aggregate CPI is expected to have risen by 5.3% year-over-year (5.1% in January), with the core edging up to 2.5% from 2.3%.

Former European officials were a fertile ground for Russian companies to recruit. Russia's actions prompted several resignations. Renzi, Italy's Prime Minister 2014-2016 resigned from the board of one of Russia's largest car-sharing companies. Aho, Finland's Premier 1991-1995 resigned from Sberbank, Russia's largest. Kern, Austria's Chancellor 2016-2017 stepped down from the monitoring board of Russia's state highway board. The question now is whether former German Chancellor (1998-2005) Schroeder, resigns as Chairman of the Rosneft's board of directors. Also, Fillon, who served as France's Prime Minister (2007-2012) quits Sibur, a large Russian petrochemical company's board. Fillon joined the board in December.

Reports suggest that several large European utilities were trying to secure more gas from Russia yesterday. Long-term contracts with Gazprom become considerably cheaper than the spot gas in European hubs that many seem to prefer. At one point yesterday, European natural gas prices surged by a record 62%. Meanwhile, Russian gas exports through the Ukrainian pipeline jumped by more than a third yesterday and the order book suggests strong shipments today as well. At the end of last year, Russia was the third-largest source of US oil imports, behind Canada and Mexico. 

The euro plunged to almost $1.11 yesterday before rebounding above $1.12 in late dealings as US equities also recovery. The euro managed to extend yesterday's recovery by about 1/10 of a cent to nearly $1.1230, but it drifted lower in late Asia and early European turnover. It found support near $1.1170. Given the uncertainties in eastern Europe, discretionary participants may be reluctant to extend risk exposure ahead of the weekend. There are options for around 770 mln euros at $1.12 that expire today, but likely were neutralized yesterday if not before. Sterling plummeted from around $1.3550 to slightly below $1.3275, a new low for the year, before recovering to around $1.34. It made its to almost $1.3440 today before sellers reemerged. Initial support was seen in the European morning near $1.3370. There is an option for about GBP350 at $1.34 that expires today.


The US continues to rollout sanctions against Russia and maintaining a coordinated effort. One price of that coordination is that Russia is not being removed now from the Swift payment system to keep the EU aboard. Instead, Russia's top banks have been sanctioned and will have limited ability to transact in the US, UK, or EU. In addition, the US announced a new export regime requires new licenses to export goods from the US and goods made by foreign companies with US parts and designs. The goal is to choke off Russia's defense, aerospace, and maritime sectors. The EU, Australia, Japan, the UK, South Korea, and Taiwan are expected to take similar measures. 

Many economists are focused on wheat and energy disruptions with Russia's attack. We have seen what has happened in energy. The May wheat futures price jumped 5.6% yesterday. It was the third consecutive advance for a cumulative 16% gain. Today is it off about 4.2%. Less appreciated is the fact that Ukraine accounts for almost 50% of sunflower oil exports. A drought in South America is threatening the soy crop in Brazil, Argentina, and Paraguay. The price of soybeans, and therefore soy oil is rising (highest since 2008). As an animal feed, rising soy and corn prices will likely translate to higher meat prices. A shortage of palm oil from Malaysia due to Covid-related restriction is lifting the prices as well. Edible oils are part of the food inflation. 

The US reports January income and consumption and durable goods orders. Income is expected to reverse December's 0.3% gain, while personal spending is likely to more than recover the 0.6% decline in December. The 1.6% increase expected (median forecast, Bloomberg's survey) would be the strongest since last March, when government aid helped boost personal consumption expenditures by 5.2%. The focus, though, is on the deflator. The headline deflator is expected to firm to 6% from 5.8% and the core deflator may have edged up to 5.2% from 4.9%. Fed Governor Waller joined Governor Bowman is putting a 50 bp hike next month back on the table. The odds of the larger move had fallen from a little over 80% before the US warned on February 11 that a Russian attack could take place at any time to about 10% yesterday. It has rebounded back to a little more than a 1-in-4 chance.

The risk-off move yesterday saw the US dollar jumped through the CAD1.28 area to reach almost $1.2880. The gains were pared, but the greenback still closed above CAD1.28. Although the markets ae calmer, the US dollar remains firm. New buying emerged in front of CAD1.2770 earlier today. The Bank of Canada meets next week, and the swaps market is pricing in about an 80% chance of a 50 bp move. Even with that the Canadian dollar is finding little traction and is set to fall for the second consecutive week. The greenback jumped from MXN20.2380 to around MXN20.7850 yesterday. The 1.55% gain was the largest since last November. The dollar is offered below MXN20.45 in the European morning. A move below MXN20.39 weakens the dollar's technical note. The 200-day moving average is closer to MXN20.3550. Yesterday's firmer than expected bi-weekly CPI (headline and core) boosts the chances of a 50 bp hike by Banxico when it meets on March 24. 

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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