Powerful short squeeze lifts nickel, while the prospect of new joint EU bonds help steady the euro

Overview: A powerful short squeeze in nickel saw the price double for the second day before the London Metal Exchange suspended trading.  It had allowed traders to defer delivery obligations.  However, other key commodity markets are a bit calmer today.  April WTI is in a $3 range on either side of $120.  US natural gas is about 3% lower after a 3.6% loss to start the week. European natgas is seeing early gains of more than 11% pared back to around 2.5%. Copper is a little firmer after sliding more than 4% yesterday.  Iron ore slipped after rising 5.7% on Monday.  Wheat is threatening to snap a six-day 50% rally. Turning to the capital markets, after a rough start in the Asia Pacific, which saw most bourses slump 1%-2%, except India, equities have stabilized.  Led by strong gains in utilities and financials, Europe's Stoxx 600 is up about 0.4% near midday, as earlier stronger gains are pared. US futures are showing small gains. Yields recovered yesterday in the US and Europe, and Asia Pacific played catch-up earlier today.  Europe's peripheral bonds are outperforming the core markets today.  The US 10-year benchmark yield is up about seven basis points to 1.85%. The Scandis and euro are enjoying modest gains in the foreign exchange market, while the dollar-bloc, which reversed lower yesterday continues to trade heavily.  The yen and Swiss franc are also under modest pressure.  Among the emerging market complex, the central European currencies are enjoying a reprieve from the recent selling, as the market awaits the Polish central bank decision.  While most expect a 50 bp hike, the larger than expected Hungarian move last week, and zloty weakness that spurred central bank intervention, warns of an asymmetrical risk of a larger hike.  The JP Morgan Emerging Market Currency Index is off about 0.4%, after falling almost 3.5% over the past three sessions.  

Asia Pacific

Anecdotal reports seemed to suggest that several large asset managers reduced their exposure to Chinese bonds last month.  Bloomberg reports that global funds appeared to have sold CNY35 bln (~$5.5 bln) of Chinese debt last month, which would be a record amount.   Since the Russian invasion of Ukraine (February 24), Chinese bonds have performed miserably (30th of 46 sovereign bond markets Bloomberg tracks).   Some suspect that Russian names may have liquidated some Chinese bonds to help buffer the sanctions.  Chinese bonds had been touted a safe haven, but the 10-year yield is up about 15 bp since late January.   Reports also suggest mainland investors, including domestic funds, brokerages and commercial banks were also sellers. 

Japan reported an unexpectedly strong rise in January cash earnings, but a larger than expected deterioration of its current account. Labor cash earnings, which fell by 0.4% year-over-year in December, jumped 0.9% in January.  The median forecast in Bloomberg's survey was for a 0.1% gain. It is the largest rise since last May.  Unlike what many workers are experiencing in Europe and North America, real wages rose in Japan (0.4% year-over-year). It is too early to draw a conclusion about the trajectory. A survey in the Nikkei of more than 6000 companies showed almost a third do not intend to raise wages in the fiscal year beginning April 1. Most planned to grant raises by less than the 3% Prime Minister Kishida advocates. 

Japan's current account balance always (more than 20 years) deteriorates in January from December. The deterioration was more than expected this year as the deficit widened to JPY1.19 trillion from JPY370 bln.  Most of the worsening came from the trade balance. The deficit swelled to JPY1.6 trillion from almost JPY319 bln. In January, Japanese investors bought JPY1.15 trillion (~$10 bln) of euro-denominated bonds, the most in more than a year. They divested JPY15.4 bln of Russian bonds, the most in almost eight years.  Japanese investors were also sellers of US and Australian bonds. 

The dollar is trading with a firmer bias against the Japanese yen. It reached a three-day high near JPY115.65.  Recall it briefly traded below JPY114.80 yesterday. The greenback has not traded above JPY115.80 since mid-February.   We suspect that are will cap advances today, barring new developments. Support is seen in the JPY115.20-JPY115.40 area initially. The Australian dollar staged a stunning reversal yesterday, falling from around $0.7440, its highest level since early last November, to nearly $0.7310.  Follow-through selling today pressured it to almost $0.7265 where new bids were found. There are about A$1.2 bln in options struck in the $0.7250-$0.7254 area that expire today. The dollar opened near CNY6.3160 and briefly dipped below CNY6.31 before snapping back to its opening levels. The PBOC set the dollar's reference rate weaker than expected at CNY6.3185 compared with expectations (Bloomberg survey) for CNY6.3239. Some suggest that rouble's volatility is making it more difficult to anticipate the fix. There is no onshore price for the rouble exchange rate.  Many are relying on offshore indications where spreads are very wide.  

Europe

The recent string of German economic data suggests the economy was off to a strong start of the year before Russia's hostilities. Yesterday, Germany reported a slightly stronger than expected 2% rise in January retail sales and a 1.8% rise in factory orders (1.0% expected).  Today, Europe's largest-economy reported a 2.7% jump in industrial output, more than five-times the gain expected by the median forecast in Bloomberg's survey.  And on top of that the 0.3% fall in December's industrial production was revised away.  It rose 1.1%.  

US legislation to ban imports of Russian oil and gas is making progress. Europe says it is working on cutting Russian gas imports by 2/3 within a year. Russia is threatening to cut Nord Stream 1 gas deliveries. Separately, JP Morgan indicated it will remove Russian bonds from all of its indices, which are used as benchmarks for asset managers. MSCI and S&P have taken similar actions.  

The European Commission is reportedly set to propose a large joint bond issue to finance defense and energy projects. An emergency EU summit (heads of state) will be held on Thursday. This follows last year's initiative that included joint debt to fund a 1.8 trillion euro (~$2 trillion) emergency package. The details are still being worked out, but the prospect seems to be helping support the euro today and narrowing the spreads between core and peripheral bonds.  

The euro is trading within yesterday's range (~$1.0805-$1.0960).  It could be the first session in seven that the euro does not take out the previous session's low. Still, there is little enthusiasm or energy on the upside. A move to $1.0920 in late Asia seemed to attract sellers in early European turnover. Initial support is seen around $1.0850.  Note that the lower Bollinger Band is near $1.0880. Sterling was not as lucky.  It fell below $1.31 for the first time since November 2020 in late Asian activity but has rebounded in the European morning to around $1.3135. There may be scope for additional near-term gains, but they look to be limited to the $1.3150-$1.3170 area.  

America

Average US gasoline prices are north of $4 a gallon, the highest since 2008. Last week's 10% rise lifted the year-over-year increase to around 50%. Oil imports from Russia accounted for 245 mln barrels last year or around 8% of US imports, which is less than Mexico and Canada, but more than Saudi Arabia. The US imported 198 mln barrels of Russian oil in 2020. 

Coinbase announced it froze thousands of Russian crypto accounts. Switzerland said that it too was freezing crypto assets owned by Russian individuals and companies that had been sanctioned by the EU. The Biden administration is expected to outline the government's broad approach to crypto later this week. Some fear that Russia could use crypto to bypass the sanctions.  Meanwhile, note that the US Congress is coming against Friday's deadline for funding the government.  However, the failure to do so would likely generate another continuing resolution rather than a government shutdown.   

The US reports the January trade deficit.  It likely deteriorated by almost 10% to more than $87 bln.  Some US imports are likely going to rebuild inventories. Canada reports its January merchandise trade balance and after a small deficit in December, it is expected to have swung back into surplus. Canada is experiencing a positive terms of trade shock fueled by rising commodity prices.  

The US dollar dipped below CAD1.26 in the middle of last week.  This was the lowest level for the greenback since late January and looked to be a breakout. However, this year has seen many false breaks, and this was another one. The US dollar reversed higher off that low and rallied about 1.8% through yesterday's high, which was above CAD1.28. Follow-through buying has the greenback near CAD1.2835 in the European morning. Late last month, it spiked to almost CAD1.2880. The US dollar is getting stretched technically as it toys with the upper Bollinger Band (~CAD1.2830).  Still, there is no compelling sign that it is exhausted. However, look for a top in the next day or two, ahead of the Canadian jobs data at the end of the week.The Mexican peso remains out of favor. The dollar settled February a little below MXN20.50.  It peaked above MXN21.46 today before steadying. The greenback is well above its upper Bollinger Band (~MXN21.17) for the third consecutive session. A firm inflation report tomorrow may boost talk of a 75 bp hike instead of 50 bp when Banxico meets on March 24.