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MNI EUROPEAN MARKETS ANALYSIS: Nickel, Crude & Market Plumbing

  • The continued surge in Nickel prices dominated headline flow overnight, with the short squeeze taking out the $100.000/ton mark.
  • Libya's Sharara oilfield (~300K bpd output) came back online, briefly pressuring crude, before a bid came back in given the continued worry surrounding tight crude oil markets and the threat of the U.S. imposing unilateral bans on Russian oil.
  • Credit Suisse's Pozsar flagged his expectations for U.S. June FRA/OIS to widen to at least 50bp.
  • Final Eurozone GDP, German industrial output, Canadian trade data as well as U.S. trade balance & wholesale inventories take focus on the data front today.


BOND SUMMARY: Core FI Lower In Asia, JGB Curve Bear Steepens

U.S. Tsys shunted lower as Libya’s Sharara oilfield came back online, which provide some modest and brief downward pressure for crude oil markets in Asia hours, allowing some of the stagflationary worry to ease out of the U.S. Tsy space. Flow was headlined by a FV/TY block (4,818 vs. 3,070), although we didn’t get a clear read on the direction of the trade. This came after a late NY FV/TY flattener (-36,188/+22,452) block. Elsewhere, the latest piece from Credit Suisse’s STIR/market plumbing watcher Pozsar flagged his belief that June FRA/OIS could widen further (to at least 50bp), adding further pressure to STIRs, triggering some ED/SFR & FRA/OIS widening flows. TYM2 last -0-08+ at 127-27, 0-04+ off the base of the contract’s 0-13+ overnight range, with oil now higher on the day. Cash Tsys run 1.5bp cheaper to 0.5bp richer across the curve, twist flattening, with a pivot around the 20-Year zone. Eurodollar futures run 0.5-4.0 ticks cheaper through the reds, with EDM2 leading the way lower post-Pozsar. Looking ahead. NY hours bring the latest NFIB small business optimism reading & trade balance print. We will also get the latest round of 3-Year Tsy supply.

  • JGBs looked through the latest re-run of well-trodden rhetoric from BoJ Governor Kuroda, as he offered nothing new. Meanwhile the BoJ offered to buy Y3tn of JGBs in repurchase agreements after the overnight call rate moved close to 0% on Monday. Some suggested that the BoJ stepped in ahead of seasonal demand for funding ahead of the end of the Japanese FY, while there may have been some need to address concerns surrounding the Ukraine conflict. Elsewhere, we also got a less than inspiring round of 5-Year JGB supply, with the low price missing broader expectations (marginally), as the cover ratio slid to a 12-month low. JGB futures were -11 at the bell, recovering from worst levels of the day, while the cash JGB curve bear steepened. Paper out to 10s was 1bp cheaper on the day, while 30s and 40s cheapened by over 4bp.
  • Aussie bonds fell afoul of some trans-Tasman spill over in early Sydney trade, after ANZ adjusted their RBNZ call to back-to-back 50bp OCR hikes in April & May. The aforementioned dip in U.S. Tsys then applied further pressure, with fresh selling then showing up into the Sydney close. That left YM -9.5, while XM was -9.75 at the bell, as both contracts closed just above worst levels. Bills were flat to 12bp cheaper on the day, with weakness in bonds and the U.S. Eurodollar strip helping there.

JGBS AUCTION: Japanese MOF sells Y2.0279tn 5-Year JGBs:

The Japanese Ministry of Finance (MOF) sells Y2.0279tn 5-Year JGBs:

  • Average Yield -0.007% (prev. 0.040%)
  • Average Price 100.06 (prev. 99.83)
  • High Yield: -0.003% (prev. 0.044%)
  • Low Price 100.04 (prev. 99.81)
  • % Allotted At High Yield: 57.3359% (prev. 89.0225%)
  • Bid/Cover: 3.292x (prev. 3.386x)

AUSSIE BONDS: The AOFM sells A$150mn of the 0.25% 21 Nov I/L ‘32 Bond, issue #CAIN416:

The Australian Office of Financial Management (AOFM) sells A$150mn of the 0.25% 21 November I/L 2032 Bond, issue #CAIN416:

  • Average Yield: -0.2759% (prev. -0.1892%)
  • High Yield: -0.2675% (prev. -0.1700%)
  • Bid/Cover: 4.0067x (prev. 1.5333x)
  • Amount allotted at highest accepted yield as percentage of amount bid at that yield 60.0% (prev. 88.9%)
  • Bidders 46 (prev. 23), successful 18 (prev. 19), allocated in full 16 (prev. 17)

FOREX: G10 Price Action Reflects Moderation In Russia Worry, Yuan Gains After PBOC Fix

The Russian rouble was indicated sharply higher in offshore trade, posting its largest one-day gain since 1998 (note that the bulk of gains were unwound), as EU member states failed to reach consensus on banning Russian oil imports. The perceived odds of a swift imposition of embargo on Russian crude by European buyers faded amid Germany-led opposition to the proposal and comments from OPEC SecGen Barkindo, who suggested that alternative suppliers don't have sufficient capacity to replace Russia's output. The rouble's upswing occurred amid wide bid-ask spreads and particularly thin liquidity, with local markets shut for a public holiday.

  • Fresh headline flow did not offer any notable positives re: situation on the ground in Ukraine, albeit Kyiv pledged to "continue intensive consultations" with Moscow, which came on the heels of news that Turkey will host a trilateral meeting with Ukrainian and Russian Foreign Ministers this Thursday.
  • Demand for safe haven currencies abated, with the USD, JPY and CHF landing at/near the bottom of the G10 pile. The Antipodeans caught a bid in early trade before giving away those gains. European currencies outperformed amid reassessment of the situation in Ukraine.
  • Offshore yuan caught a bid after the PBOC displayed the strongest bias in the daily fixing of USD/CNY reference rate since Oct 2020. The firmer-than-expected fixing stood in contrast to the People's Bank recent reluctance to allow for more redback appreciation.
  • Final EZ GDP, German industrial output, Canadian trade data as well as U.S. trade balance & wholesale inventories take focus on the data front today.

FOREX OPTIONS: Expiries for Mar08 NY cut 1000ET (Source DTCC)

  • EUR/USD: $1.0990-1.1010(E2.3bln), $1.1100(E730mln), $1.1160-65(E795mln)
  • USD/JPY: Y114.00($724mln)
  • GBP/USD: $1.3350-60(Gbp520mln)
  • AUD/USD: $0.7250-65(A$1.2bln), $0.7350-65(A$632mln)
  • NZD/USD: $0.6650(N$623mln)
  • USD/CAD: C$1.2665-80($525mln)

ASIA FX: Won Goes Offered On Eve Of Election, Yuan Firms Post-PBOC Fix

The Asia EM space got some reprieve from recent risk-off impulses, with yuan strength lending some further support. South Korean won lagged its regional peers and refused to find poise on the eve of a local presidential election.

  • CNH: Spot USD/CNH went offered after the PBOC set the central USD/CNY mid-point 54 pips below sell-side estimate, which represented the strongest bias (in yuan terms) since Oct 2020. The fixing marked an about-face from China's central bank, who on several recent occasions had used their daily fixings to signal discomfort with redback appreciation.
  • KRW: Spot USD/KRW rallied to fresh cycle highs, with South Korea's looming presidential election fuelling uncertainty. Final opinion polls showed that the main candidates were locked in a tight race, although opposition People Power Party's Yoon has since secured the backing of the third-ranking candidate. USD/KRW 1-week implied volatility surged to levels not seen since Nov 2020, with other tenors also posting new cycle highs.
  • IDR: The rupiah was slightly firmer, possibly drawing some support from better oil prices. Domestic headline flow failed to provide much to write home about.
  • MYR: Spot USD/MYR traded on a stronger footing. The Klang Valley and parts of Selangor were hit by heavy rainfall on Monday, just three months after the nation experienced devastating floods.
  • PHP: Spot USD/PHP pulled back from a fresh cycle high of PHP52.310. Comments from Philippine officials were doing the rounds, with the government looking into ways of mitigating the impact of ongoing war in Ukraine on domestic economy.
  • THB: Spot USD/THB crept to a one-month high. Inflation fear remained evident, with the government discussing ways to counter rising oil prices.

EQUITIES: Lower As Stagflation Fears Weigh

Major Asia-Pac equity indices are 0.8% to 1.4% weaker at typing, following a negative lead from Wall St. High-beta equities across the region experienced another day of selloffs amidst lingering stagflation fears arising from elevated commodity prices, while energy and utility stocks pared Monday’s gains as the major crude benchmarks WTI and Brent backed away from 14-year highs (although both remain above $120/bbl at writing).

  • The CSI300 sits 0.8% softer at typing, hitting fresh 20-month lows, led by weakness in richly valued healthcare and consumer discretionary stocks. It wasn’t all bad news in the space. Large-cap liquor stocks such as Luzhou Laojiao & Kweichow Moutai caught a bid on the back of a strong earnings report from the latter, leading the consumer staples sub-index higher after 4 straight sessions of losses.
  • The Hang Seng deals 0.1% lower, reversing earlier gains to trade just above 5-year lows made on Monday. High-beta tech again led the sell-off, with the Hang Seng Tech 1.0% worse off at typing. Stocks listed on the Hang Seng now trade at a 14% discount to their book value according to BBG data, the widest such margin in at least a decade.
  • U.S. e-mini equity index futures sit 0.1% to 0.2% lower at typing.

GOLD: Underpinned In Asia

Gold sits ~$12/oz lower at writing to print $1,986.1/oz, backing away from session highs at $2,000.0/oz. The move lower comes as the Dollar Index (DXY) operates near 22-month highs, while major oil benchmarks continue to trade well below Monday’s best levels, with the latter facilitating an easing of stagflation fears from recent extremes.

  • The precious metal ultimately remains bid, just shy of the recent multi-month highs on elevated worry re: the Russia-Ukraine conflict, with little by way of a diplomatic resolution in sight (a note that the third round of negotiations between Russia and Ukraine on Monday yielded no concrete measures, although both sides agreed to continue talks).
  • To recap Monday’s price action, spot gold recovered from session lows ($1,961.2/oz) to close ~$30 higher, rising as U.S. real yields & U.S. equity indices fell.
  • Looking to technical levels, gold continues to trade above its recent bull channel, drawn from the Aug 9 ’21 low. Resistance is situated at $2,030.0/oz (Aug 11 ’20 high), while support is seen at $1,983.5 (Mar 4 low).

OIL: A Touch Firmer Overnight

WTI is +$2.50 and Brent is +$2.00 at writing, printing ~$120.90 and ~$125.20, respectively. Both benchmarks have risen from session lows, with the market continuing to focus on reports that U.S. legislators are considering a unilateral embargo on Russian crude imports.

  • Still, crude continues to trade below Monday’s best levels, as participants assess the likelihood of combined sanctions on Russian crude (i.e. from the U.S., Europe, and Japan), with strong resistance to an immediate full embargo from the likes of Germany.
  • Note that oil production at Libya’s Sharara oilfield (the country’s largest, accounting for over 300K bpd of output) reportedly resumed, removing some of the risk premium that had developed earlier on Monday. However, that doesn’t do much to alter the wider supply picture. Global oil supplies remain tight, as well-documented difficulties in the sale of Russian oil continue to play out. On the impact of a total embargo on Russian oil imports, OPEC Secretary General Barkindo remarked on Monday that “there is no capacity in the world that could replace 7 million barrels per day”, underscoring how OPEC will likely not be able to make up for the resulting shortfall. Mr Barkindo also cast doubt on the effect of “demand destruction” amidst elevated crude prices, stating that “supply is increasingly lagging behind”.
  • Participants will also be keeping an eye on developments in U.S.-Venezuela talks despite little sign of progress so far, with RTRS source reports suggesting that the Biden administration is considering easing sanctions on the country’s crude exports, mainly to diversify global reliance on Russian crude.
  • From a technical perspective, recent cycle highs for WTI and Brent have reinforced the bullish trend, with resistance located at their Mar 7 highs of $130.50 and $139.13 respectively, while support is seen at $105.18 (Mar 2 low) for WTI, and $106.83 (Mar 2 low) for Brent.

UP TODAY (Times GMT/Local)

DateGMT/LocalImpactFlagCountryEvent
08/03/20220700/0800**DE industrial production
08/03/20220800/0900**ES industrial production
08/03/20220900/1000*IT retail sales
08/03/20221000/1000**UK Gilt Outright Auction Result
08/03/20221000/1100***EU GDP (2nd est.)
08/03/20221100/0600**US NFIB Small Business Optimism Index
08/03/20221330/0830**US trade balance
08/03/20221330/0830**CA International Merchandise Trade (Trade Balance)
08/03/20221355/0855**US Redbook Retail Sales Index
08/03/20221500/1000**US wholesale trade
08/03/20221500/1000**US IBD/TIPP Optimism Index
08/03/20221800/1300***US US Note 03 Year Treasury Auction Result
MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com
MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com

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