MNI EUROPEAN MARKETS ANALYSIS: Markets A Little Edgy On Return From Weekend

BOND SUMMARY: Cheaper As Asia Trade Wore On

The combination of steady LPR fixings from the PBoC, higher oil prices (although that relationship is by no means clear cut at present) and a slight hawkish tweak to Goldman Sachs’ forecast FOMC rate hike profile has seemingly fed into Tsy weakness (albeit in a delayed fashion) ahead of European hours, even with e-minis ticking lower. The wider spread re-opening of offices and manufacturing facilities in the Chinese city of Shenzhen may have helped the space move lower as well. TYM2 last prints -0-11 at 124-09+, around the base of its 0-08+ overnight range after moving lower in recent dealing, although volume has barely topped 45K. Activity in the space was dented by the fact that cash Tsy markets are not open until London hours owing to the observance of a Japanese holiday. Light cheapening was seen at the re-open, perhaps aided by headlines such as “Russia and Ukraine edge towards agreement on key peace points, says Turkey” (FT), even as the conflict rages on. Note that the Russian army has formally called on Ukrainian forces to lay down their arms in the city of Mariupol, promising safe passage out of the city if they do so. They also noted that humanitarian passage out of the city will be open at 07:00 London time on Monday. Elsewhere, the weekend saw Ukrainian President Zelenskiy reaffirm that he remains open to negotiations with his Russian counterpart, although he suggested that the failure of such peace talks would result in a third world war. On the issuance front we have seen reports that the Philippines will be coming to market with benchmark 5-, 10.5- & 25-Year US$-denominated paper, with pricing coming as soon as today, which may have fed into price action, albeit gradually. Looking ahead, the Chicago Fed National Activity index provides the only economic release of note on Monday, while Fedspeak will come from Chair Powell & Atlanta Fed President Bostic (’24 voter).

• The downtick in U.S. Tsy futures spilled over into Aussie bonds, allowing futures to erode overnight session gains as we moved through Sydney dealing, with major futures contracts going out at worst levels of the Sydney session, YM -2.0 and XM -0.5. Meanwhile, cash ACGBs twist flattened on the day (partly owing to Friday’s Tsy move), pivoting around 15s. The latest ACGB Jun-39 auction provided comfortable pricing through mids, although the cover ratio was on the soft side, printing below the 2.50x mark. While dealer liaison may have unearthed some demand, it would seem that the flatness of the curve and prevailing vol. in markets (as well as the early Monday timing of the auction) may have deterred some prospective bidders at auction. Still, those who were willing to add to their exposure of the line were seemingly willing to pay up. Note that PM Morrison’s ruling coalition lost the South Australia state election over the weekend, ahead of what is set to be a tough Federal Election for the ruling coalition. Monday saw Morrison signal budget measures to counter the cost of living crisis, as the political circuit warms up ahead of the aforementioned Federal election.

FOREX: Greenback Creeps Higher As E-Minis Slip On Firmer Oil

The key gauge of greenback strength (DXY) crept higher as U.S. e-mini futures conceded some ground amid rising crude oil prices. Liquidity was limited by a market closure in Japan as the nation observed a public holiday.

• Participants took stock of Russia's ongoing invasion of Ukraine, as Turkey pointed to growing convergence on some key issues in ceasefire talks, but Kyiv rejected Moscow's demand to surrender the besieged port city of Mariupol.
• The Russian rouble was indicated higher in offshore trade. CBR Gov Nabiullina said that the central bank will buy OFZs once they resume trading on Moscow Exchange Monday, but is planning to sell them "after the situation on financial markets stabilises."
• Most G10 currency pairs meandered after oil-tied FX lost their initial allure. Australia's decision to ban alumina exports to Russia may have negated initial demand for the local currency.
• Spot USD/CNH added ~100 pips at the start to the week as the PBOC kept Loan Prime Rates unchanged and set the midpoint of permitted USD/CNY trading band fairly close to the average sell-side estimate.
• The broader data docket is fairly light during the remainder of the day, which shifts focus to central bank speak from ECB's Lagarde, Makhlouf & Nagel as well as Fed's Powell & Bostic.

FOREX OPTIONS: Expiries for Mar21 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1100(E2.6bln), $1.1150(E646mln)
• USD/JPY: Y116.90-05($1.1bln), Y118.00($635mln), Y118.95-00($635mln)
• USD/CAD: C$1.2740-55($1.4bln)

ASIA FX: Firmer Oil Undermines Won, No Change To China's LPR

Higher crude oil prices applied selling pressure to the South Korean won, while the PBOC kept LPRs unchanged.

• CNH: Spot USD/CNH crept higher but failed to challenge the previous trading session's high. The PBOC kept its Loan Prime Rates unchanged today (in line with consensus forecast), while the divergence of yuan fixing from expectations shrank to typical levels.
• KRW: The won leapt higher as higher crude oil prices sapped strength from the currency amid another apparent missile test conducted by North Korea.
• IDR: Spot USD/IDR operated close to unchanged levels, holding a tight range in the first trading session of the week.
• MYR: Spot USD/MYR crept higher, even as PM Ismail Sabri said the country was on track to meet its 2022 economic targets. Looking into the rear-view mirror, trade data from Friday showed that February shipments missed expectations.
• PHP: Spot USD/PHP held above neutral levels. The government pledged measures to boost food imports, thus keeping prices in check.
• THB: The baht went offered amid light domestic news flow.

EQUITIES: Japanese Markets Closed, Easing Impulse Fades For China, Hong Kong Stocks

Major Asia-Pac equity indices are flat to a lower at writing despite a positive lead from Wall St., with lower liquidity owing to the closure of Japanese markets for a holiday evident. Commodity-linked sectors across the region are a little higher amidst a rally in commodity benchmarks during Asian hours (BBG Commodity Index: +1.3% at typing), while high-beta equities struggled as the PBoC kept its benchmark lending rate unchanged.

• The ASX200 pared early gains to deal a little below neutral levels at the close, narrowly snapping a three-day streak of gains as outperformance in tech (S&P/ASX All Technology Index: +1.7%) and commodity-related sectors (i.e. materials, utilities, and energy) was countered by a decline high-beta healthcare stocks and industrials.
• The CSI300 underperformed, giving up earlier gains to sit 0.6% lower at typing. Minor gains witnessed in the materials and energy sub-indices were countered by weakness in richly-valued consumer staples equities. The move lower in high-beta equities comes after the PBoC’s monthly LPR fixings were conducted at unchanged levels on Monday, unwinding some of the expectations for monetary policy easing after Vice Premier Liu He issued dovish guidance re: the future direction of PBoC policy in last week’s well-documented comments.
• The Hang Seng deals 0.9% softer at typing, reversing earlier gains on losses in the real estate sub-index. Sentiment in China-based real estate stocks weakened as shares of China Evergrande Group and two of its units were suspended from trading on Monday (no reason was provided, although an announcement re: its restructuring is expected), while a rising number of developers have announced delays to the reporting of their annual results, exacerbating governance concerns from some quarters.
• U.S. e-mini equity index futures are 0.5% to 0.7% worse off at typing, operating around session lows heading into European hours.

GOLD: Higher In Asia

Gold trades $5/oz firmer, printing ~$1,927/oz at typing. The precious metal currently operates clear of Friday’s trough as focus turns to developments in the Russia-Ukraine conflict (particularly on a possible diplomatic resolution from ongoing ceasefire talks), with the dust having settled from the FOMC’s monetary policy announcement last week.

• To recap, gold closed ~$70 lower last week, for its sharpest weekly drop in ~9 months. The move came as the Fed hiked rates on Wednesday (signalling at least six more 25bp hikes in ’22), while elsewhere, daily talks between Ukrainian and Russian negotiators helped fuel some optimism for a diplomatic resolution, removing some of the geopolitical risk premium from gold re: the war in Ukraine.
• Focusing on Russia-Ukraine talks, negotiators from both sides have planned to resume talks on Monday (timing unconfirmed at writing). The top Ukrainian negotiator (Podolyak) has cautioned that talks may take “several weeks” partly due to well-documented positions that Kyiv refuses to concede (i.e. recognition of breakaway regions & Russian annexation of Crimea), although he also stated that a ceasefire could be agreed upon “in days” (as opposed to a peace deal happening quickly). A note that Turkey’s FM Kalin also said over the weekend that agreement between Russia and Ukraine over “critical” issues was near, expressing that he was “hopeful for a ceasefire”.
• Looking to technical levels, bullion’s short-term conditions remain bearish, following the pullback from Mar 8 cycle highs at $2,070.4/oz. The longer-term bullish trend remains intact however, with the pullback considered to be corrective. Support is situated at $1,895.3 (Mar 15 low), while resistance is seen at $1,954.7/oz (Mar 15 high).

OIL: Higher As Supply Worries Linger

WTI and Brent are ~$3.50 higher apiece to print ~$108.20 and ~$111.40 respectively, operating around last week’s best levels at typing.

• To recap, both benchmarks closed ~$2 higher on Friday, building on a rally earlier in the week as worry re: potential crude supply shortages arising from western sanctions on Russia countered incremental progress in ongoing Russia-Ukraine ceasefire talks.
• Elsewhere, the international rush to secure alternatives to Russian energy supplies continues to develop. Germany and Qatar announced contracts for LNG supplies, although the longer-term view surrounding such developments (Germany currently has no LNG terminals) suggests that tightness in global crude and energy supply is unlikely to find near-term relief.
• Turning to the Middle East, Houthi attacks over the weekend on at least six separate sites across Saudi Arabia (including an Aramco fuel depot and an LNG plant) were confirmed by Saudi Aramco CEO Nasser as having virtually no impact on the company’s operations.