Markets
The Ukrainian conflict with Russia continued to set the tone on financial markets. Reports of some 190k troops having amassed near Ukraine’s borders shattered market hopes for a diplomatic way out even as the US’s and Russia’s foreign ministers agreed to talk further this week. European stocks eased about 1%. The Nasdaq (-1.23%) underperformed in the US ahead of the long weekend (US on Monday closed for President’s Day). Core bonds gained with the German Bund outperforming despite more ECB members (Kazimir, Vasle) arguing for faster policy normalization. The curve bull steepened with yields dropping 4.9-5.6 bps in the 2y-5y and 3.9 bps in the 10y. The latter neared a first support level just below 0.20%. US yields fell -0.1 bps (2y) to -5.2 bps (30y) in a bull flattening move. As with core bonds, the US dollar enjoyed save haven flows too, appreciating vs most peers. The trade-weighted DXY rose to 96.04. EUR/USD slid from 1.136 to 1.132. Other haven currencies including the yen and the Swiss franc mostly gained too. Strong UK retail sales concluded the economic update last week. The BoE is poised to hike further but much (if not all) has been discounted already. The pound gained against the euro amid risk-off nevertheless and continues to be a EUR/USD copycat. EUR/GBP drifted towards 0.833.
Japanese PMI confidence this morning came in weak amid Omicron-related restrictions (see below). The trading session is dominated however by … news on the geopolitical front. President Biden and Putin agreed to their French counterpart Macron’s proposal to meet. Most Asian-Pacific stocks still trade in the red but significantly paired the much bigger losses at the open. European futures inches half a percent higher. US Treasuries’ and German Bund’s gains evaporated. The dollar is under pressure. EUR/USD is able to recoup all of Friday’s losses (1.137). USD/JPY doesn’t make it above 115 though.
Focus turns to Europe today since the US remains closed. February PMIs in the region are likely to improve with earlier Covid restrictions having been reversed in many countries. At this time in the cycle, activity data such as the PMIs usually get more market attention but we have to admit that this hasn’t been so much the case yet. We’re keen to see whether that starts to change. A good reading in any case may reinforce current market optimism. We must add, though, that risk sentiment is very much ebbing and flowing according to the geopolitical headline of the day. Core bond yields may recover from Friday’s hit. We look for Germany’s 10y and the European 10y swap yield to find support at 0.188% and 0.77% respectively. The euro should be capable of at least maintaining current gains vs the dollar and sterling. First resistance in EUR/USD situates at 1.1386.
News Headlines
Japanese February PMI’s deteriorated significantly. The composite PMI fell from 49.9 to 44.6 with both manufacturing (52.9 from 55.4) and services (42.7 from 47.6) contributing. It’s the sharpest decline in 20 months. The omicron variant of the Covid-19 virus led to record case numbers and renewed restrictions in Japan in February. Details were weaker across the board with stronger declining output, lower orders and a weaker, though still positive, outlook. Rising input prices and material shortages, notably in fuel and metals continued to dampen private sector activity. Last month saw the strongest rise in average cost burdens since August 2008. The Japanese yen doesn’t budge this morning near USD/JPY 115.
Australian February PMI’s marked a stark contrast with the Japanese numbers. The composite PMI rebounded from 46.7 to 55.9, especially driven by the services sector (56.4 from 46.6). The manufacturing gauge rose further from 55.1 to 57.6. The easing of the (January) Omicron wave enabled a rapid return to growth for the Australian private sector. Demand and output both recovered, boding well for hiring activity in February. Shortages of input materials and labour persisted as issues for private sector firms, leading to a continued sharp increase of input prices. Selling price inflation hit a record in February. The Aussie dollar gains this morning with AUD/USD moving from 0.7170 to 0.7220 in a generally positive risk climate.
