From Marc to Market:
Overview: The capital and commodity markets are becoming less orderly. The scramble for dollars is pressuring the cross-currency basis swaps. Volatility is racing higher in bond and stock markets. The industrial metals and other supplies, and foodstuffs that Russia and Ukraine are important providers have skyrocketed. Large Asia Pacific equity markets, including Japan, Hong Kong, China, and Taiwan fell by 1%-2%, while South Korea, Australia, and India managed to post modest gains today. Europe's Stoxx 600 is off more than 2.5% to bring this week's loss to a little more than 6%. It has risen only one week so far this year. US futures are around 0.7% weaker. The 10-year US Treasury yield is near 1.78%, a five-basis point decline on the week. The 2-10-year yield curve continues to flatten and is slipping below 30 bp today. European benchmark yields are 2-4 bp lower today and 14-16 bp lower on the week. The Australian and New Zealand dollars are outperforming in the foreign exchange market. Both are up around 0.5% today and nearly 2% and 1.4% for the week, respectively. The euro and Swedish krona are off around 0.6% to bring the weekly drop to 2.2% and 4%, respectively, and bring up the rear. Central European currencies continue to fare the worst among emerging market currencies. Other freely accessible emerging market currencies are falling in sympathy. Latam currencies are performing best this week, with the Colombian peso (~4%) and the Brazilian real (~2.5%) coming into today.
Gold is firm, pushing against $1950, the high for the week. It has spiked to $1975 last week. April WTI is recovering from yesterday's 2.6% decline. It is up more than 18% this week. US natural gas is rising around 1.5% today to bring the week's gain to 7%. Europe's benchmark is extending its advance and is up about 85% this week, after a 27% gain last week. May wheat is limitedly up and extends this week's gain to over 40%. Although iron ore dipped (still up nearly 15% for the week) and copper is a little softer too (up ~6.7% this week), aluminum is at record highs and other industrial metals are firm.
Asia Pacific
A powerful argument is sweeping across the financial markets and political discourse. In its essence it says that as a consequence of the sanctions on Russia's central bank and banning most major Russian banks from SWIFT will encourage other countries, and especially China to find alternatives to the dollar. Fed Chair Powell acknowledged that it could accelerate China's efforts. However, unlike other observers, Powell acknowledged that China has been trying to do so "for some time." They have their own messaging system, but few use it. The same is true of the European payment system for that matter. Of course, China chafes in a world that is still very American and dollar centric. Yes, it would like an alternative, but no they haven't found one. And that "some time" that Powell referred to is more than a decade. The large multi-year energy agreement struck between China and Russia will be settled in euros, not dollars. Yet, the EU and UK (and others) have also sanctioned Russian banks, banned trading with the Russian central bank, and the eviction from SWIFT. In this regard, the alternative to the dollar cannot be the euro.
The Asian Infrastructure Investment Bank, a Chinese initiative for which it is a 27% shareholder, has frozen Russian and Belarus activities. Russia is the third-largest shareholder (6%) after China and India. Russia has one of the five vice presidents and oversees bank lending. When the AIIB was launched, the US did not want its allies joining, but many in Europe did and NATO countries account for almost a quarter the votes. The World Bank has also halted programs for Russia and Belarus.
There were two high-frequency data points to note. First, Japan's January unemployment rate unexpectedly ticked to 2.8% from 2.7%. As the PMI (composite below 50 for the second consecutive month) and other data have shown, the world's third-largest economy is struggling here in Q1. The job-to-applicant ratio jumped to 1.20 from 1.16. It is the highest since May 2020, giving hope that of a recovery in Q2. Second, while inflation is not a problem in China or Japan, price pressures are accelerating in South Korea. February CPI rose by 0.6% to lift the year-over-year rate to 3.7%. The median forecast in Bloomberg's survey was for a 3.5% pace. The core stands at 3.2%, up from 3% and also stronger than expected. The central bank does not meet until the middle of April and the market appears to have largely priced in another 25 bp hike. It lifted rates twice last year and one this year....
....MUCH MORE
