New York had a relatively quiet session overnight, with Europe’s announcement that its next round of sanctions would include Russian coal imports, having no impact on energy prices. A relatively slow calendar and few new developments from Eastern Europe saw Wall Street equities reverse intra-day losses to close slightly higher, long-dated US yields edged higher, and the US dollar booked very modest gains.
Fed sending out hawkish signals
St Louis Federal Reserve President Bullard was the latest FED talking head to come out with a series of hawkish statements on future monetary policy. The fact that equities recovered intraday losses suggests that the 225 basis points of Fed Funds hikes futures markets have now priced in could be enough for now. It is the Fed’s battle to lose, not win. That could see the US dollar rally pause for breath over the next fortnight, but I believe the real stress point will be the Federal Reserve’s quantitative tightening, slated for a May start, and the appetite from the market to absorb the sales.
In Asia, markets are growing warier about China as the Shanghai lockdown drags on and it reports over 24,000 virus cases today. China’s Covid-zero policy continues to be its Achilles heel although there are plenty of other reasons to be a little cautious. A serious spread outside of its finance and commercial to other large cities will be a big headwind for China’s growth, China stocks, and by default eventually, much of Asia.
Despite talking up assisting SMEs and propping up the stock market, little has happened since the initial comments from Premier Li Keqiang. The PBOC has set neutral USD/CNY fixes this week and has net drained CNY 580 bio from the system this week via open market operations. Perhaps some could be interpreted as draining excess liquidity post this week’s two-day holiday, but until China backs up its rhetoric with action, much like the Federal Reserve ironically, the environment for China equities will be challenging. We could see the 1-year MTF trimmed soon along with a RRR cut.
Data from Asia today has been mostly positive. South Korea’s Current Account rose to USD 6.42 bio, Japan’s Current Account rose to yen 1643 bio, while the Philippines’ Current Account deficit fell to USD -3.53 bio. The data is from February and thus, is slightly backwards-looking. At that stage, all three were still enjoying the premium from easing virus restrictions with South Korean and Japanese exports booming. However, the data for all three hides surging import costs as the Ukraine war started, and I expect those costs to continue negatively impacting data from the region going forward. That should be enough to distract the Bank of Korea from pencilling in a 0.25% rate hike next week.
Today’s main event in Asia will be the latest Reserve Bank of India interest rate decision. The INR has remained steady in April after a roller-coaster ride in March, but the RBI has shown little regard for the currency in its policy mix over the past 2 years, tolerating stagflationary pressures as the price of keeping the economy going. That is unlikely to change today, especially given the event of the past 6 weeks. Policy rates should be left unchanged at 4.0%.
Otherwise, the data calendar across Europe and the US is decidedly second-tier and quiet. It wouldn’t surprise me if the conditions we are seeing in Asia today continue through to the New York close. If oil keeps falling, equities should finish the week on a positive note, temporarily at least.
Keep an eye on France’s first round of the presidential election runoff this weekend. The election should narrow the second runoff on the 24th of April to President Macron and far-right candidate Marine Le Pen. A strong showing by Ms Le Pen this weekend will send chills through Europe and be another reason to sell euros and European equities on Monday.
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