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Markets

Central banks/authorities in Central-Europe walk the talk. The Polish central bank yesterday and two days ago intervened in FX  markets to support the ailing zloty. There were no amounts specified. Additionally, the Polish government showed readiness to convert euro proceeds (coming from EU funds) into zloty’s directly via the market instead of via the NBP. This would increase selling pressure in EUR/PLN. Deputy Governor Virag a few days ago said Hungary’s central bank (MNB) was ready to intervene to ensure stability. He referred to rate hikes as being the most important tool to defend the forint. The MNB today made a move by jacking up the weekly deposit rate from 4.60% to 5.35%, close to the current ceiling of the interest rate corridor (5.4%). Unfortunately though, the impact of both the NBP and the MNB on their respective currencies was modest. The forint stabilizes vs the euro at record lows of EUR/HUF 378. EUR/PLN inches higher to surpass 4.76, a new 13-year low for the zloty. The Czech koruna extends a recent losing streak to EUR/CZK 25.66. The central bank (CNB) there also hinted at potential FX interventions. But while it has massive legacy FX reserves, the CNB kept power dry for now.

Other markets are muddling through. European stocks trade with minor losses, WS opens in light green. Brent oil briefly hit $120/b (> +4%) before paring all (and more) gains on rumours/reports that a nuclear deal with Iran would soon be signed. This could pave the way for now-boycotted Iranian oil to flow to the market again. The black gold currently loses 0.3% to $112. Soft commodities including wheat (+6.4%) continue to soar. Core bonds are under pressure with Europe/German Bunds underperforming. The German curve flattens with yield changes ranging from +1.8 bps (30y) to 6.2 bps (2y). The 10y (+3.9 bps) extends its return above 0%. European swap yields advance 3bps + across the curve. The 2y swap yield bounced off -0.10% yesterday – the level seen just before ECB president’s Lagarde verbal pivot. It is extending gains to 0.05% today. The 10y swap yield (0.74%) nears first resistance (0.77%). US bond yields hover sideways. FX markets trade quietly. EUR/USD remains below 1.11 with the euro unable to profit from ECB meeting minutes. There were a lot of inflation concerns which has become more widespread. The main risk was no longer of tightening policy too early but too late. Some already wanted to adjust guidance on phasing out APP in February. With war in the meantime having erupted, the minutes of course lost relevance. Sterling ekes out another minor gain after yesterday’s rally that caused a technical break in EUR/GBP below the previous YtD lows. The pair is currently changing hands at 0.828, extensively testing December 2019 support at 0.8277.

News Headlines

Inflation in Turkey continued to move higher in February from already extreme levels. Headline inflation printed at 4.81% M/M to be 54.44% higher compared to the same month last year (was 48.69% in January). Core inflation also accelerated from 39.45% to 44.05%. In a Y/Y perspective costs of transportation rose 75.75%, followed by furnishes and household equipment (64.83%) and food and beverages (64.47%). The ‘slowest’ annual increase was recorded for communication services (11.89%). February PPI inflation jumped 7.22% M/M to be up an astonishing 105.01% Y/Y suggesting further upward inflationary risks, even as the government took measures to alleviate price rises on some basic goods. The Turkish lira lost modest ground today even as the real policy rate is becoming ever more negative (EUR/TRY 15.75 area).

We’re speaking of a different degree of inflation compared to most other countries, but even Swiss inflation in February also surprised on the upside. Headline inflation rose 0.7% M/M and 2.2% Y/Y, well above expectations and the highest reading since 2008. Price increase for fuel, housing rental and heating were mentioned as driving the rise. Core inflation excluding fresh and seasonal products, energy and fuel also rose a faster than expected 1.3% Y/Y (from 0.8% in January). The Swiss franc today strengthened further below the 1.02 handle (1.0190).

US ISM Services PMI dropped from 59.9 to 56.5 in February, well below expectation of 60.5. Looking at some details, business activity/production dropped -4.8 to 55.1. New orders dropped -5.6 to 48.5. Employment dropped -3.8 to 48.5. Prices rose 0.8 to 83.1.

ISM said: The past relationship between the Services PMI and the overall economy indicates that the Services PMI for February (56.5 percent) corresponds to a 2.3-percent increase in real gross domestic product (GDP) on an annualized basis."

Full release here.

JP 225 index looks to be creating a floor around the 26,100 support as the RSI and the MACD seem to have reached a bottom in bearish territory and are now changing direction to the upside.

Traders, however, would be more eager to engage in buying activities if the price manages to surpass the nearby 20-day simple moving average (SMA) around 26,950. If this is successfully breached, then the rally may next rest near the 40-day SMA at 27,281 and the 27,900 resistance. Moreover, a closure above the 200-day SMA at 28,474 may be needed to push the price towards the valid resistance trendline dewan from the September 2021 peak of 30,800.

On the flip side, the selling pressure could accelerate again if the market deteriorates below the former strong support area of 26,100. Such a move could next bring the 15-month low of 25,555 under the spotlight, which if violated could trigger sharper losses probably towards the 2019 peaks of 24,171.

In the medium-term timeframe, the pair is in a bearish trend since September 2021 and only a rally above the descending trend line would put the market in a sideways path.

The focus remains firmly fixated on the situation in Ukraine and nothing else matters, it seems, for the markets. Tensions between Russia and the West continue to wreak havoc across financial markets and the energy sector in particular. From their lows last week to their highs this week, prices of both oil contracts have rallied a huge 30% each. This morning saw Brent crude oil nearly hit the $120 per barrel mark, before retreating a huge $5. Talking of volatility! WTI similarly eased sharply after momentarily trading above the 2011 high of $115.00. Investors are just waiting to see if the ongoing talks between Russia and Ukraine will lead to any ceasefire. Putin and Macron are also apparently talking. The uncertainty is weighing on risk appetite, with European stocks unable to catch any momentum to the upside. US index futures held their own slightly better, trading around the flat line at the time of writing.

But all the attention will be on those talks between delegations from Russia and Ukraine, and oil prices. Unless something changes in the Ukraine conflict, it is difficult to see where the pressure will come from, because the OPEC decided against hiking their output more aggressively. The inelasticity of the demand curve for oil means, prices can rise even further before we see any noticeable drop in demand.

The crude oil market was already tight, even before the invasion of Ukraine by Russia. But now there are concerns that because of the ongoing situation, foreign refiners are going to be very reluctant to buy crude oil from Russia, with some banks also refusing to finance shipments of Russian commodities. In effect, this is the same as an actual drop in Russian exports of crude oil. Moscow must find ways to continue selling its oil, otherwise there is the risk of an even bigger oil-price shock.

The unthinkable would be if fresh measures are introduced that would directly target oil and gas exports from Russia, or if the latter retaliates by turning off supplies of these commodities to its western neighbours in Europe. An energy-dependant Europe will want to avoid this situation, nearly at all costs. But traders are not taking any chances as fighting in Ukraine continues, while international payments to and from Russia become increasingly very difficult with the West’s decision to exclude several Russian banks from the SWIFT global financial messaging system.

So, don’t be surprised if oil prices rebound again after easing some $5 off their earlier highs.

Source: ThinkMarkets and TadingView.com

On the hourly chart of the WTI contract, one can see that despite the big drop, prices remain highly volatile inside the rising channel. As such, it is far too early to suggest we may have seen the top. Prices can easily rebound if the Ukraine talks are unsuccessful in de-escalating the situation.

Dollar shines but euro slips on geopolitics

The ongoing Russian invasion in Ukraine, alongside the tough Western sanctions and their imminent effects on the global economy continue to be the key drivers for the markets today. Although a new round of negotiations between the two countries is taking place at the moment of writing, there are not any concrete signs of de-escalation so far, thus volatility is expected to remain high. These recent developments in the Ukrainian crisis seem to be increasing risk aversion in markets but positive news from the ongoing meeting could alter  investors’ sentiment.

The US dollar is trading higher on the day, capitalizing on the mild risk-off mood in markets despite the weakness observed in US Treasury yields. In addition, the dollar got an extra boost as the weekly jobless claims decreased to 215k against the 225k projection, providing optimistic signals about the upcoming NFP report on Friday and the overall health of the US labor market. On the other hand, the euro is losing ground for a fourth consecutive day as soaring risk aversion and the softer-than-expected February PMI reading for the Eurozone are acting as a headwind for the single currency.

Elsewhere, the Australian dollar is the absolute winner in the forex spectrum, supported by the booming commodity prices and the increasing bets for faster hikes by the RBA.

US futures edge higher despite initial retreat

Wall Street is set to open higher today and extend yesterday’s gains as the major indexes’ futures are trading higher in pre-market trade. Fed Chair Jerome Powell noted yesterday that the central bank is going to ‘proceed carefully’ with its rate hike timeline in order to avoid a market overreaction. This statement improved market sentiment and enabled indices to storm higher, but the persistently high inflation, the elevated energy prices, and the absence of signs that Russia is going to stop its invasion soon continue to pose downside risks for the US stock markets.

Oil rally eases; gold ticks down

Despite rallying early in today’s session, WTI futures have surrendered a huge part of their gains as an imminent Iran nuclear deal, which is expected to improve oil’s supply outlook, is drawing closer. On the other hand, gold is on the retreat following US jobless claims data release, heavily pressured by the stronger dollar, while the softer US Treasury yields and the moderate risk-off sentiment in markets seem to be capping its downside.

Main events coming up

The ISM services PMI report for February is due at 15:00 GMT today and is expected to inch higher to 61 from 59.9 in January. However, it is unlikely to affect the pace and timing of the Fed’s rate hike timeline as the central bank is more focused on inflation than growth outlook.

Daily Pivots: (S1) 114.98; (P) 115.34; (R1) 115.87; More...

No change in USD/JPY's outlook as range trading is still in progress. Intraday bias remains neutral for the moment. On the upside, firm break of 116.34 will resume larger up trend from 102.58 to 118.65 long term resistance next. On the downside, though, break of 114.40 will continue the corrective pattern from 116.34 with another fall to 113.46 support.

In the bigger picture, no change in the view that rise from 102.58 is the third leg of the up trend from 101.18 (2020 low). Such rally should target a test on 118.65 (2016 high). Sustained break there will pave the way to 120.85 (2015 high) and raise the chance of long term up trend resumption. This will remain the favored case as long as 55 week EMA (now at 111.64) holds.

Daily Pivots: (S1) 0.9167; (P) 0.9204; (R1) 0.9240; More....

Intraday bias in USD/CHF remains neutral as range trading continues. Choppy rise from 0.8925 would still be in favor to extend higher as long as 0.9090 support holds. Break of 0.9341 will target 0.9372 resistance and then 0.9471. On the downside, however, break of 0.9090 will bring deeper fall back to 0.8925 support.

In the bigger picture, medium term outlook will be neutral at best as long as 0.9471 resistance holds. Larger down trend could still extend through 0.8756 (2021 low). However, firm break of 0.9471 will argue that the trend has already reversed and rebound the rally from 0.8756 with another impulsive move.

Daily Pivots: (S1) 1.3316; (P) 1.3362; (R1) 1.3451; More...

GBP/USD is staying in sideway trading and intraday bias remains neutral at this point. Further decline is expected with 1.3485 support turned resistance intact. On the downside, break of 1.3272 will target 1.3158 low. Further break there will resume larger down trend from 1.4248. However, firm break of 1.3485 will dampen this bearish view and turn bias back to the upside for 1.3641 resistance.

In the bigger picture, as long as 38.2% retracement of 1.1409 to 1.4248 at 1.3164 holds, up trend from 1.1409 (2020 low) is still in progress. On resumption, next target will be 38.2% retracement of 2.1161 to 1.1409 at 1.5134. Nevertheless sustained break of 1.3164 will argue that whole rise from 1.1409 has completed and bring deeper fall to 61.8% retracement at 1.2493.

Daily Pivots: (S1) 1.1074; (P) 1.1109; (R1) 1.1159; More...

Intraday bias in EUR/USD remains on the downside for the moment. Current fall is part of the down trend from 1.2348. Next target is 61.8% projection of 1.2265 to 1.1120 from 1.1494 at 1.0786. On the upside, break of 1.1273 resistance is needed to be the first sign of bottoming. Otherwise, outlook stays bearish in case of recovery.

In the bigger picture, the decline from 1.2348 (2021 high) is expected to continue as long as 1.1494 resistance holds. Firm break of 1.0635 (2020 low) will raise the chance of long term down trend resumption and target a retest on 1.0339 (2017 low) next. Nevertheless, break of 1.1494 will maintain medium term neutral outlook, and extend range trading first.

Overall, market sentiment is rather stable today, with major European indexes just slightly lower, while US futures point to recovery. Benchmark treasury yields are also ticking slightly higher. WTI crude oil is retreating slightly after breaking 115 handle. Gold is gyrating in tight range above 1900. In the currency markets, Euro remains the weakest one for today, followed by Sterling. Yen also softens on recovery yields. Aussie, Swiss Franc and Dollar are the stronger ones.

Technically, CHF/JPY is breaking out from near term range, resuming the rebound from 124.53. Further rise is mildly in favor to retest 127.05 high. With solid support from 55 day EMA too, the larger up trend could be ready to resume through 127.05. Swiss Franc might have an upper hand in safe haven flows, with help from Euro selloff.

In Europe, at the time of writing, FTSE is down -0.88%. DAX is down -0.57%. CAC is up 0.05%. Germany 10-year yield is up 0.037 at 0.066. Earlier in Asia, Nikkei rose 0.70%. Hong Kong HSI rose 0.55%. China Shanghai SSE dropped -0.09%. Singapore Strait Times rose 0.29%. Japan 10-year JGB yield rose 0.352 to 0.169.

US initial jobless claims dropped to 215k, better than expectation

US initial jobless claims dropped -18k to 215k in the week ending February 25, better than expectation of 235k. Four-week moving average of initial claims dropped -5k to 230.5k.

Continuing claims rose 2k to 1476k in the week ending February 19. Four-week moving average of continuing claims dropped -36k to 1540k, lowest since April 4, 1970.

ECB accounts: Main risk is tightening monetary policy too late

In the accounts of February ECB meeting, it was argued that monetary policy in the current environment was to "ensure that inflation expectations remained firmly anchored " and to "avoid the risk of the prevailing high inflation becoming entrenched."

"Caution was expressed about basing the Governing Council's assessment on wage data which were only available with a lag.  In this environment, the main risk was no longer of tightening monetary policy too early but too late," the accounts noted.

It's also argued that "an earlier monetary policy normalisation would reduce the risk of abrupt tightening later on, which could potentially be associated with high economic and social costs."

"In the light of the increased uncertainty and the heightened upside risks to the inflation outlook, the general view prevailed that the Governing Council should convey its increased alertness and should monitor incoming information carefully, in particular regarding second-round effects."

Eurozone PPI at 5.2% mom, 30.6% yoy in Jan

Eurozone PPI rose 5.2% mom, 30.6% yoy in January, above expectation of 3.0% mom, 26.9% yoy. For the month, industrial producer prices increased by 11.6% in the energy sector, by 2.7% for intermediate goods, by 2.2% for durable consumer goods, by 1.6% for non-durable consumer goods and by 1.5% for capital goods. Prices in total industry excluding energy increased by 2.2%.

EU PPI rose 4.9% mom, 30.3% yoy. The highest monthly increases in industrial producer prices were recorded in Romania (+12.0%), Belgium (+10.2%) and Slovakia (+8.7%). Decreases were observed in Ireland (-11.4%), Sweden (-0.7%), Luxembourg (-0.3%), and Finland (-0.2%).

Eurozone unemployment rate dropped to 6.8% in January, EU down to 6.2%

Eurozone unemployment rate dropped from 7.0% to 6.8% in January, better than expectation of 6.9%. EU unemployment rate dropped from 6.3% to 6.2%.

Eurostat estimates that 13.346 million men and women in the EU, of whom 11.225 million in the euro area, were unemployed in January 2022. Compared with December 2021, the number of persons unemployed decreased by 216 000 in the EU and by 214 000 in the euro area. Compared with January 2021, unemployment decreased by 2.522 million in the EU and by 2.117 million in the euro area.

Eurozone PMI composite finalized at 55.5, commensurate with GDP growth in excess of 0.6%

Eurozone PMI Services was finalized at 55.8, up from January's 51.1. PMI Composite was finalized at 55.5, up from January's 52.3. That's also the strongest reading since last September.

Looking at some member states, Ireland PMI Composite rose to 59.1, 3-month high. Spain rose to 56.5, 3-month high. Germany rose to 55.6, 6-month high. France rose to 55.5 while Italy rose to 53.6.

Chris Williamson, Chief Business Economist at IHS Markit said: "The survey data for February depict a eurozone economy that was regaining robust growth momentum ahead of the invasion of Ukraine. Business activity accelerated to a pace commensurate with GDP growth in excess of 0.6%, buoyed by a relaxation of virus restrictions...

"Though it remains early days to be assessing the impact of the war, growth prospects are also likely to have been hit by heightened risk aversion and new sanctions, dampening the rebound from the pandemic. With inflation risks rising and growth prospects waning, the Ukraine conflict adds to business and household headwinds for the coming months, and exacerbates the difficult juggling act of the ECB in controlling inflation while sustaining a robust economic recovery."

Germany PMI Services was finalized at 55.8 in February, up from January's 52.2. PMI Composite was finalized at 55.6, up from January's 53.8. That's also the highest level since last August.

France PMI Services was finalized at 55.5 in February, up from January's nine-month low of 53.1. PMI Composite was finalized at 55.5, up from January's nine-month low of 52.7.

UK PMI services finalized at 60.5 in Feb, composite at 59.9

UK PMI Services was finalized at 60.5 in February, up from January's 54.1. That's the highest level since last June. PMI Composite was finalized at 59.9, up from February's 54.2.

Andrew Harker, Economics Director at IHS Markit: "The ebbing of the Omicron wave of the COVID-19 pandemic contributed to a rebound in growth in the UK service sector in February, with rates of expansion in activity and new business up sharply... Although the latest set of PMI data were encouraging, the inflationary picture still has the potential to limit growth, while it remains to be seen what impact the Russian invasion of Ukraine will have on the service sector and wider economy."

BoJ Nakagawa: Core inflation may briefly hit 2% on energy, food and industrial goods

BoJ board member Junko Nakagawa said "for the time being, inflationary pressure will remain strong, mainly for energy, food and industrial goods." Core consumer prices may "briefly rise close to 2%."

However, "even if that happens, what's important is to scrutinise the factors and whether Japan's economic fundamentals are strong enough to make such price rises sustainable," she said.

"Global financial markets remain jittery due to escalating tensions in Ukraine. We're monitoring changes in developments carefully," she added.

China Caixin PMI composite unchanged at 50.1, still under triple pressure

China Caixin PMI Services dropped from 51.4 to 50.2 in February. PMI Composite was unchanged at 50.1.

Wang Zhe, Senior Economist at Caixin Insight Group said: "Overall, the manufacturing PMI rose in February, while the services PMI fell, but both remained in positive territory. Demand in the manufacturing sector improved, while demand in the services sector was greatly affected by the epidemic....

"Under the "triple pressure" of demand contraction, supply shocks and weakening expectations, the economy's recovery is still not robust. Stabilizing economic growth remains an important focus of the government."

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1074; (P) 1.1109; (R1) 1.1159; More...

Intraday bias in EUR/USD remains on the downside for the moment. Current fall is part of the down trend from 1.2348. Next target is 61.8% projection of 1.2265 to 1.1120 from 1.1494 at 1.0786. On the upside, break of 1.1273 resistance is needed to be the first sign of bottoming. Otherwise, outlook stays bearish in case of recovery.

In the bigger picture, the decline from 1.2348 (2021 high) is expected to continue as long as 1.1494 resistance holds. Firm break of 1.0635 (2020 low) will raise the chance of long term down trend resumption and target a retest on 1.0339 (2017 low) next. Nevertheless, break of 1.1494 will maintain medium term neutral outlook, and extend range trading first.

Economic Indicators Update