Asia Session: Equity Markets Look To Price-In Peak-Ukraine; Dollar Remains Firm

The New York session on Monday once again saw a sharp reversal of fortunes, reversing the post-weekend Russia sanctions sell-off. Oil, the US dollar, and gold fell, while equities stage an uneven comeback. The power of buy-the-dip is an irresistible force in equity markets still, and it appears the street will look for any excuse to justify jumping back in. The fall in US yields over the entire curve on investor haven flows, may have jolted that process along.

Yesterday, the meeting between Ukrainian and Russian officials on the Belarus border was inconclusive, but they agreed to meet again. That was enough for the street to try and price in peak-Ukraine. Markets may well feel that the worst of the bad news is now out there, especially on the sanctions front. I am not so sure of that, but the market is always right, and we have to respect the momentum from a short-term perspective.

Interestingly, Bitcoin staged a near 15% rally overnight, and I am guessing traders are pricing in the cryptos will become an alternative to rubles as Russian citizens desperately remove their money from local banks and switch it into any alternative they can get their hands on. I would have expected this trade to appear much sooner, but the European and US SWIFT announcements and the freezing of central bank and oligarch assets appear to have finally set that ball rolling.

Asian equity markets are off to a strong start as well, as bargain hunters emerge in force, a rerun of the second half of last week's price action. This is telling; it shows that there is still plenty of money on the sidelines waiting to get back in if, indeed, peak Ukraine has arrived. It is equally likely though, we see another panicked rush for the door is a stream of negative headlines, a breakdown in Ukraine-Russia talks for example, or widespread use by Russia of thermobaric explosives, starts hitting the wires.

Sentiment has been aided in Asia today by data out of China. The official manufacturing and non-manufacturing February PMIs outperformed, as did the private Caixin Manufacturing PMI survey. That alleviated fears of a China slowdown and has displaced property sector nerves off the front page for now. That may not last though, with a heavy schedule of bond and trust payments due from Chinese developers over March.

Elsewhere, a slew of Manufacturing PMIs from across ASEAN held their own or outperformed as well, suggesting that regional economies have weathered the Omicron storm. Driving around in Jakarta this weekend, traffic looks back to pre-pandemic levels, despite the high number of cases. Peak-virus will offset the troubles in Eastern Europe to some extent for Asia, but it means the inflation question has not gone away. If anything, it implies inflation will become more worrisome and entrenched. Be careful getting too bullish on equities. If the Ukraine situation doesn’t cause central banks to lose their nerves, we have a lot of monetary tightening coming.

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One central bank fighting that narrative—for now—is the Reserve Bank of Australia. It left rates unchanged at record lows of 0.10% this morning, citing Ukraine's uncertainty and sub-target wages growth. The latter is the last part of a three-part puzzle for the RBA, which includes inflation and growth. I expect the RBA to throw in the towel on holding rates steady in the next month or two, that’s certainly what the Australian bond market is pricing.

Eurozone inflation data this week won’t capture any Ukraine-derived spikes, but it seems almost certain to be on its way. Whether that is dismissed as a one-off by the ECB remains to be seen. High prints may force their hand into more rate hike clarity anyway. The Bank of Canada will almost certainly hike by 25bps this week. That leaves us with the US where ISM Manufacturing is released today, ADP Employment tomorrow, and then US Nonfarm Payrolls on Friday. A strong set of prints should lock and load 25bps from the FOMC this month. Jerome Powell’s two-day testimony on the Hill from tomorrow may give us some hints about just how far behind the curve the Fed believes it now is. As I said earlier, price-in peak-Ukraine if you wish, but the world’s central banks mean you probably shouldn’t fall in love with that trade in 2022.

Asian equities mostly held their own yesterday in the face of the weekend Russia sanction news, although European ones, as expected, were stretchered off injured. A Ukraine-Russia meeting was as good a reason as having a clutching-at-straws rally. That’s certainly what New York thought, likely also pricing in that the West didn’t have a lot more sanctions bad news to dish out.

That saw New York unwind much of its intraday losses on a peak-Ukraine rally. The S&P 500 closed just 0.24% lower, while the NASDAQ rallied to close in positive territory, rising 0.41%. The Dow Jones, with a higher beta to the Ukraine conflict and Russian sanctions, finished only 0.50% lower. US Futures have eased slightly in Asian trading.

Asian markets are rallying powerfully though on easing Ukraine fears and strong regional PMIs, especially from China. Japan’s Nikkei 225 is 1.50% higher with South Korea closed for a holiday. In China, the Shanghai Composite and CSI 300 have climbed by 0.30%, while omicron malaise sees the Hang Seng unchanged.

Singapore has jumped 0.85% higher, with Taipei leaping 1.65% higher, and Jakarta rallying by 1.05%. Malaysia is closed today but Bangkok has climbed 0.70%, and Manila by 0.85%. Australian markets are completely unperturbed by the huge flooding in Queensland and New South Wales, with the ASX 200 rising by0.65%, and the All Ordinaries rallying by 0.85%,

The overnight price action, and a strong performance by Asia today, is likely to be enough for European investors to dip their toes into the markets once again this afternoon. With a much higher correlation to the dramas in Eastern Europe, gains will be both limited and tentative and that will be the state of play in Europe for some time to come.

The US dollar finished higher overnight, but only marginally so as the peak-Ukraine rally in equities caused the greenback to give back much of its intra-day gains. The Dollar Index finished 0.21% higher at 96.75, before climbing another 0.12% to 96.86 in Asia today.

Given the bargain hunter mentality sweeping the equity markets, it is interesting that the US dollar continues to trade firm, even moreso given the move lower by US yields across the curve overnight. That implies that haven flows are still quite substantial and are heading into the US dollar and the US bond market. Buying the US dollar remains the easiest way to express the war on Ukraine by Russia, and as such, despite the noise in equity and energy markets, I expect currency markets to continue reflecting those concerns. A powerful set of US data this week or hawkish testimony from Powell will put a 0.50% hike this month by the FOMC front and center, another bullish US dollar factor.

EUR/USD remains at 1.1200 and seems to be weathering the storm at these levels. 1.1100 remains its critical support. GBP/USD is holding at 1.3400 with 1.3300 and 1.3550 its immediate support/resistance. The US/Japan rate differential is back in play on USD/JPY, with the fall in US yields overnight dragging USD/JPY back to 115.15. Only a loss of 114.50 suggests a deeper correction.

AUD/USD and NZD/USD rallied impressively by 0.45% overnight, before retreating by 0.20% today to 0.7255 and 0.6755 respectively. Like the euro, both antipodeans are weathering the Eastern European storm at the moment and looking at the charts, both could be in the process of forming longer-term inverse head-and-shoulder formations, bullish structures. There is still water to flow under the bridge before this is confirmed though, and a mid-March FOMC and Ukraine developments to negotiate.

While the USD/CNY remains anchored at 6.3100, Asian currencies also rallied overnight, although only back to their starting points from the open yesterday morning. Asian FX remains acutely vulnerable to inflation developments, oil rallies and negative developments in the Ukraine-Russia situation.

Interestingly, despite the extreme intra-day volatility in oil markets, on a closing basis, Brent crude has hardly moved over the past five sessions, closing between $97.00 and $98.00 a barrel. Oil spiking early in the day on Ukraine-related developments but failing to maintain momentum and giving back those gains in New York. Exactly the same thing happened overnight, Brent crude touching $105.00 a barrel intraday, before retreating to finish 0.40% lower at $98.00 a barrel. By contrast, WTI held onto its gains, finishing 4.0% higher at 95.85 a barrel.

Part of the reason for Brent’s relative underperformance is that the SWIFT measures by Europe appear to leave the door open for energy payments to Russian entities. We are still somewhat in the dark on the exact Russian banks and the scope of the blockage from SWIFT. Secondly, officials have said that a new Iran nuclear agreement is 98% done. Hopes that an agreement is close may also be capping gains. We should not expect much from OPEC+ this week, as the grouping itself is already running at near full capacity to pump more oil. Additionally, the meeting between Ukrainian and Russian officials will be giving energy markets some hope that the worst is now priced in.

Nevertheless, oil prices have resumed their ascent in Asia as regional buyers, once again, seize on any material dips in prices to enter the market. Brent crude is 1.0% higher at $99.00 a barrel, and WTI has risen by 0.85% to $96.65 a barrel. Brent crude faces substantial headwinds at $106.00 a barrel, although support at $96.00 is unlikely to give way. WTI has support/resistance at $90.00 and $100.00 a barrel. Ukrainian developments still skew risks to the upside.

Once again, gold failed to hold onto its risk-aversion gains from yesterday morning, fading in New York as sentiment swung once again, and finishing the day just 1.05% higher at $1909.50 an ounce. In Asia, investors have continued to lighten haven positioning as equities have rallied, gold falling 0.20% to $1905.50 an ounce.

Gold’s inability to hold rallies above $1920.00 an ounce is a bearish development, even more so given that US yields fell across the curve overnight. We will need a substantial deterioration in the Eastern European situation from here, to spark a rally through $2000.00 an ounce.

Gold has resistance at $1930.00 which I believe is unlikely to break this week. That is followed by $1975.00 an ounce. Support lies a $1880.00 an ounce with a failure likely to trigger a larger culling of long positions, sending it back to $1820.00 an ounce.

Written By: MarketPulse