Geopolitics Overshadow the Fed, Greenback Steadies

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  • Investors remain focused on the preparations to strike Syria and the still-tense rhetoric on trade
  • The 0.8% decline in eurozone IP was considerably larger than expected
  • Sweden reported softer than expected inflation figures and weaker house prices
  • Bank of Korea kept rates steady at 1.5%, as expected; India reports March CPI and February IP; Peru central bank is expected to keep rates steady at 2.75%

The dollar is broadly firmer against the majors. Sterling and Kiwi are outperforming, while Stockie and Swissie are underperforming. EM currencies are mostly weaker. RUB and TRY are outperforming, while ZAR and KRW are underperforming. MSCI Asia Pacific was down 0.5%, with the Nikkei falling 0.1%. MSCI EM is down 0.1% on the day, with the Shanghai Composite falling 0.9%. Euro Stoxx 600 is flat near midday, while S&P futures are pointing to a higher open. The 10-year US yield is flat at 2.78%. Commodity prices are mixed, with oil up 0.1%, copper down 2.1%, and gold down 0.5%.

The US dollar has steadied at lower levels, while equities eased as investors remain focused on the preparations to strike Syria and the still-tense rhetoric on trade. Reports indicate that the US and France have moved warships into the area and the UK has moved submarines within striking distance as well.

One thing that complicates matters is Russia’s threats to retaliate in defense of Syria. This obviously risks a larger confrontation with Russia. That there is a civil war in Yemen that has killed tens of thousands of civilians without much outcry in the many of the same countries who are morally outraged at the deaths in Syria suggests a more complicated narrative. The UN High Commissioner for Human Rights estimates that Saudi-led coalition air attacks has caused almost two-thirds of reported civilian deaths, while the Houthis have been accused of causing mass civilian casualties due to their attack on Yemen’s third-largest city.

This is important to understand the general cautiousness of investors throughout the capital markets. The possibility of a large-scale military confrontation, with the civil war in Yemen being another front, is a serious risk. It is not as if there is a large broad decline in equities. It is more of a drift lower as potential buyers move to the sidelines. The MSCI Asia Pacific Index snapped a three-day advance with nearly a 0.5% decline today. India, Malaysia, and Thailand are bucking the trend and posting modest gains.

European equities are mixed, but the major markets are nursing small losses. Consumer staples, real estate, telecom, and materials are trading heavily, while energy and financials are firm. The Dow Jones Stoxx 600 is off for the second consecutive session. During which time it has surrendered the gains scored Tuesday, leaving it slightly higher on the week.

Several national reports had warned of downside risks to eurozone aggregate industrial production, but the 0.8% decline was considerably larger than expected. It was only partly blunted by a revision to the January data that saw the initial -1.0% decline revised to -0.6%. February was the third consecutive monthly decline, the longest decline since 2009. We suspect poor weather weighed on the regional economy in Q1, but it appears that the economic cycle has peaked. The implication is that the economy is likely to strengthen in Q2 as the weather effect passes, but is unlikely to return to the level of activity seen in the second half of 2017.

The euro remains range-bound against the dollar. It has been in a two-cent range between $1.22 and $1.24 this month. It approached $1.24 yesterday but has been pushed back to $1.2330 following the disappointing industrial output figures. The euro has entered a range that houses three options strikes that expire today. The strikes are $1.23, $1.2325, and $1.2345 and the notional amounts are 535 mln euros, 667 mln euros, and 803 mln euros respectively.

The Swedish krona is losing to the euro today. Sweden reported softer than expected inflation figures and weaker house prices. The euro is making new multiyear highs against the krona today, reaching almost SEK10.38. Note that the SEK10.41 area corresponds to a 61.8% retracement of the euro’s decline from the 2009 high near SEK11.79.

Sweden’s Riksbank has had negative rates for three years, and it is still not satisfied with its inflation results. The headline and underlying inflation (using fixed interest rates) rose but not as much as expected. The headline rate rose 0.3% m/m and 1.9% y/y, rather than 2.0%-2.1% that economists expected. The underlying rate also rose 0.3%, with the y/y rate rising to 2.0% from 1.7%.

Although the Norwegian krone and Swedish krona are typically highly correlated, Norway has been outperforming Sweden significantly this year. The krona is the weakest major currency this year, losing 2.7% against the dollar, while the krone has gained 5.3%. News that Norway’s airline may the target of an acquisition by the UK’s IAG may be helping to underpin the krone today, which is stronger than the euro even if weaker than the dollar.

Higher oil prices may also be a factor. Oil prices hit a three-year high yesterday and are broadly steady today. Geopolitical tensions dominate. A strike on Syria could disrupt supplies. Venezuela’s output seems nearly in free-fall, and Iran could see renewed sanctions. Last month, the IEA noted that as of late January, oil inventories were 53 mln barrels above the five-year average compared with 302 mln barrels a year before.   That said, the US reported that its inventories rose 3.3 mln barrels last week, while the market had expected a little more than a mln barrel drawdown.

The dollar is steady against the yen, holding near JPY107. Good bids were found yesterday near JPY106.65, where a shelf has been carved out in recent sessions. The upside has been stymied near JPY107.50. There are a couple of chunky options near current levels that will be cut today. At JPY107 there are options with a notional value of $813 mln, and at JPY107.20 another $513 mln is struck.

The US data is of secondary if not tertiary importance today. Weekly initial jobless claims and import/export prices are on tap. They are not typically market movers in the best of times when there are no other distractions. Canada reports new house prices. The greenback is trading within yesterday’s range against the Canadian dollar to consolidate its recent losses that brought it down from CAD1.29 at the end of March to CAD1.2545 yesterday. The measuring objective of the topping pattern that was traced in March is near CAD1.2475.

Bank of Korea kept rates steady at 1.5%, as expected. It also shaved its inflation forecast for this year down a tick to 1.6% whilst keeping the 2019 forecast unchanged at 2%. Note CPI rose 1.3% y/y in March, further below the 2% target. Given the building risks to global trade and regional growth, we think BOK will remain extra cautious on rates after starting the tightening cycle in November with a 25 bp hike. Market is looking for the next hike in Q3 but we do not think it is in any hurry. Much will depend on global developments.

India reports March CPI and February IP. CPI is expected to rise 4.1% y/y vs. 4.4% in February, which would still be in the upper half of the RBI’s 2-6% target range. Note the RBI just cut its inflation forecast for the first half of FY2018/19 to 4.7-5.1% from 5.1-5.6% previously. The RBI is likely to remain on hold for now, and markets are not pricing in a hike until early 2019.

Peru central bank is expected to keep rates steady at 2.75%. CPI rose 0.4% y/y in March, well below the 1-3% target range. We think the easing cycle remains intact, but the central bank will likely stick to its recent pattern of cutting every other month. Since it just cut 25 bp at the March meeting, we see the next cut in May.