Return of risk appetite (for now)

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Overview: A pullback in yields boosts risk appetite today, pushing stocks higher and weighing on the greenback. Most Asia-Pacific stock markets rebounded at least 1%, led by Hong Kong. It was the best regional performance in a month. Europe’s Stoxx 600 is up nearly 1.5% for its third straight advance, while US futures point to a higher open. The US 10-year rate fell from the 2% test and is about four basis points lower at nearly 1.92%. European benchmark yields are 3 to 5 basis points lower. The dollar weakened up to 0.25%, led by the Scandinavians and the Antipodes. Emerging market currencies are also mostly firmer, with the JP Morgan EM FX index up for the third session. Gold pushes higher for the fourth straight session to test $1830. After falling around 3.25% in the past two sessions, March WTI is stabilizing above yesterday’s low near $88.50. After stabilizing yesterday, US natural gas prices are near two-week lows, while the European benchmark is firm after falling 7.5% in the past two sessions . Iron ore takes a six-day lead, while copper is under pressure for the third session in a row.

Asia Pacific

The absence of the Bank of Japan continues to be notable. Many expected the central bank to step in to buy bonds to defend the upper end of the 10-year yield band at 0.25%. However, they have been patient and may even allow the return to go above the cap if they thought it would be for a short time. The BOJ has its next buy scheduled for Feb. 16. Officials seem confident it has the tools to enforce the cap if needed, including fixed-rate trading.

Chinese officials have warned against disclosing false prices in the iron ore market, which may have triggered today’s selloff from five-month highs. Ideas that strong infrastructure efforts and looser monetary policy helped push the metal higher. Officials warned against speculation and fraudulent pricing information last month. Iron ore had extended its rally when Chinese authorities extended the steel sector “peak emissions” deadline by five years to 2030.

The dollar hit the late January high just before JPY115.70 before breaking off. Falling yields offset risk impulses in equities. The $780 million option expiring today at JPY 115.80 looks “safe”. There is another option for $725 at 115.00 JPY that may be more risky today, but we see support ahead of it near 115.20 JPY. The Aussie dollar is testing last week’s high near $0.7170, where a AUD$605 million option expires today. A move above $0.7180 initially targets the $0.7230 area but could raise the technical tone and spur a retest of the year high around $0.7315. The Chinese Yuan strengthened a little today, recovering from yesterday’s slight slippage. The PBOC set the benchmark dollar rate slightly lower than expected at CNY 3653 from CNY 6.3659. The dollar seems to be in a short-term range of 6.35 CNY to 6.37 CNY.

Europe

The ECB has used about 1.65 trillion euros of its 1.85 trillion “envelope” for the Pandemic Emergency Purchase Program which is due to end next month. Several countries sold long-term bonds this week, including 30-year bonds from Spain, the EU’s Next Generation fund and Germany (today). The UK sold 50-year bonds. One of the topics of next month’s ECB meeting will be an update to the outlook for its pre-existing bond-buying program, APP. Under APP, around 20 billion euros, a month are purchased and this was going to double to facilitate the transition since the end of the PEPP. Meanwhile, Frenchman Villeroy has joined ECB President Lagarde in an attempt to temper the response to the ECB’s “warmongering pivot”.

News reports suggest that the crisis in Eastern Europe may be entering a new phase. Pressure may mount on Ukraine to implement this Minsk agreement which requires the reintegration of separatist regions controlled by Russia. He is terribly unpopular in Ukraine and could cause the government to collapse. Russia has tended to keep the United States at the center of the talks, but Europe is moving forward and tomorrow’s meeting in Berlin (Germany, France, Ukraine and Russia) could be important.

Elsewhere, Russia is reporting the January CPI later in the day. It is expected to accelerate and spur a 100 basis point rate hike at the central bank meeting this weekend. It has raised rates in its last seven meetings. The rate target doubled from 4.25% to 8.50%. The central bank should proceed with another 100 basis point hike (as it did in December and July). With this rise, the market expects the tightening cycle to be over or almost over. A resolution to the crisis could see foreign investors buy Russian bonds.

The Euro continues to consolidate after last week’s surge. Yesterday’s dip below $1.14 did not spur follow-up selling and the Euro is trading quietly within yesterday’s range (~$1.1395-$1.1450). Price action is hard to get excited about. The big options at $1.15 expire in the next two sessions. The British Pound is firm near $1.3585. This highlights last week’s highs (~$1.3615 – $1.3630). However, intraday momentum indicators are stretching, suggesting limited scope for gains in early North American turnover. Tomorrow, the UK will release its first estimate of Q4 GDP (~1.1% expected QoQ, same as Q3. That said, the economy appears to have lost some momentum at the end of the year, and this should be reflected in the December details.

America

Fed’s Bowman and Mester speak today ahead of tomorrow’s CPI report. The probability of a 50 basis point hike next month is off its peak above 40% and is now slightly below 30%. No Fed official has explicitly endorsed such a move, and several have opposed it. Mortgage applications and wholesale inventories today are not what move capital markets.

The EIA has raised its estimate of US oil production this year and next. Next year, he predicts the 2019 record of 12.3 million barrels per day will be surpassed. It now projects production of 12.6 million bpd. While major shale producers are stepping up their investment plans, these remain modest by 2019 standards. Several are returning more to shareholders through buyouts and dividend increases. Oil prices remain vulnerable to an evolution of tensions in Eastern Europe and to the progress of negotiations with Iran. Meanwhile, OPEC continues to struggle to meet its production target, and reports indicate that Russia missed its quota last month. The API saw a drop of 2 million barrels in US inventory, while the EIA is expected to report a build of 1.2 million barrels. Note that Canada is the largest supplier of oil to the United States and its inventories are also falling. India, the Netherlands and Canada are the top three destinations for US oil exports.

Mexico and Brazil are releasing January inflation figures today. Mexico’s CPI may fall for the second month in a row, but is expected to remain above 7%. The central bank meets tomorrow. Economists expect Banxico to rise 50 basis points as the new governor takes the helm. The swap market is forecasting a tightening of just over 100 basis points for the next three months and 200 basis points over the next 12 months. After dipping in December, Brazil’s IPCA inflation measure likely rose last month. While it may remain below its 2021 peak of 10.74% in November, it has likely remained above 10% for the fifth month in a row. The swap market still has 200 basis points of tightening expected for the next six months, but anticipates a drop by the end of the year. Brazil also releases retail sales figures for December. This is the other side of the economy. The real economy is weak. It contracted at T2 and T3-21. It may have stagnated in Q4. Retail sales are expected to have fallen 0.6% in December. Separately, note that a drought is straining Brazil’s soybean crop and pushing up US prices as the other main source of supply. US soybean export orders are strong.

The US Dollar has built a base in the CAD1.2650-CAD1.2660 area. Note that on Friday, options for over $2.7 billion expire at 1.2650 CAD. A break could find support around CAD1.2600. On the upside, initial resistance is seen in the CAD1.2720-CAD1.2730 area which holds approximately $735 million worth of expiring options. The greenback is offered against the Mexican peso. It is testing the lower end of its recent range near MXN20.50. The next area of ​​support is around MXN20.43. Meanwhile, the dollar could tumble against the Brazilian real, where it closed yesterday around BRL 5.26. Below, support is provided by BRL5.20.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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