Risk-off mood returns, US ISM manufacturing ahead
It seems the next weeks will be pivotal for volatility as Russia declared it would continue its attacks until its goals were met. The retreat in US stock futures is signalling a risk-off mood, and the USD/JPY pair is also expressing some risk-off tendencies, slipping to 114.80.
That said, the dollar index is holding above the 97.00 mark and should risk appetite continue to wane, it appears the way up for the greenback is likely, especially if investors remain drawn to its haven appeal. The euro is testing the $1.1140 level, but the pound is faring better against the greenback, hovering just beneath the $1.3400 mark.
President Putin appears to be unphased by the sanctions from the West and has taken steps of his own in response. The time cycle of these geopolitical risks is unclear, but for now the Russian President has banned all foreign currency transfers abroad, applied capital controls and kept the stock exchange closed.
The latter is feeding the risk that Russia’s stocks and bonds could be kicked out of major investment benchmarks should trading access remain limited.
Nonetheless, US ISM Manufacturing PMI data is due at 15:00 GMT today and is expected to come in at 58.0 versus the January’s figure of 57.6. The ISM employment and prices components could paint a clearer picture, which were at 54.5 and 76.1 in January. Construction spending is also key and is expected at 0.2% m/m.
Commodity price pressures and trade, RBA holds
The Australian Industry Group performance of manufacturing index came in at 53.2, suggesting an industry expansion down under, despite supply chain problems, shipping constraints and surges in freight costs, which are still affecting trade.
Meanwhile, petrol prices are at record highs and the conflict in Ukraine is adding to uncertainty in markets, inflation being one of them, which has further underpinned many commodity prices. Australia’s export earnings are highly reliant on commodity prices.
Nonetheless, with inflation expectations now around 5.3%, the RBA has kept the cash rate target at 10 basis points, commenting that they will not increase the rate until inflation is sustainable within their 2-3% target range. The emphasis was directed to worries about how persistent elevated inflation will be due to changes in global energy markets and supply issues. The aussie has gained strength and is flirting with the February 23 high of 0.7283.
Chinese manufacturing and service PMI data for February showed renewed improvement in business conditions with the gauges for both output and total new orders returning modestly into expansionary territory. Total sales in China rose despite the decline in new export business linked to the pandemic and difficulties in shipping. However, a pickup in demand conditions has aided output in February despite inflationary pressures in both input prices and output charges.
Australia exports heavily to China, and with demand expectations in China improving, there may be some risk in terms of whether the country delays purchase of commodities should prices remain elevated or run higher due to price pressures. This could seem far-fetched, but it may be one aspect to consider for the aussie failing to sustain strength, along with negative developments from Ukraine and further flows into the safe-haven dollar.
Gold is sustaining its shine, currently trading around $1,925/oz and should the Ukraine conflict drag out, the precious metal may reel in the $1,950/oz price zone. If US 10-year yields slip lower again, this could support the move.
Canadian GDP and the black liquid
In January the BoC held off from hiking its interest rate as officials were wary of the Omicron strain, but the bank highlighted that the slack in the economy was overturned and reiterated that this triggered a policy shift towards rates moving higher. Canada’s Q4 GDP data today was essentially unchanged in December 2021, resisting a 0.1% forecast as growth in services-producing industries by 0.1% was nullified by a drop in goods-producing industries by 0.1%. That said, the seasonally adjusted annual rate beat expectations of 6.5%, coming in at 6.7%. Its February Manufacturing PMI is due at 14:45 GMT. However, this is unlikely to alter the expected 25 basis points hike expected in tomorrow’s meeting. The loonie is currently around C$1.2670.
WTI oil futures have creeped back to the $100.00 per barrel mark and the picture for oil seems to remain a bullish one, with consumers looking to feel the brunt of high fuel prices and inflation as the Ukraine crisis prolongs.
UK’s MPC Member Saunders is due to speak at 18:30 GMT followed by Member Mann at 19:00 GMT.
