Equities were lower with more heavy selling in onshore Chinese markets (-4.5%), while tech names (delisting/regulation) were leading further steep losses in Hong Kong (-7.5%). In terms of catalysts, it was a bit of a perfect storm, with a sharp rise in COVID cases in China and implications for demand and supply chains and further worries about the China-Russia relationship and possible sanctions if China was to provide support to Russia visibly.
Indeed, just like the board game of Axis and Allies, the USA continued to draw support to gang up on their perceived belligerents.
The inflationary impact of multi-city lockdowns in China was overwhelming the effect of sharply lower oil prices this week on global yields. Taking the US as an example, real yields were ~20bp higher in 10y since Friday's close, reflecting a higher profile for the Fed funds—as implied by the Eurodollar strip—over the next two years.
The underperformance of the 5y relative to 2y and 10y underscored much more aggressive Fed expectations over the past two weeks, with a full 2x25bp extra rate hikes priced in for 2022, at +177bp since the beginning of March.
But buckle up, the next shortage is bricks!!!! The UK government reportedly asked the country's brick makers about cutting production if natural gas supplies were to be reduced. The issue was about whether kilns can be cooled and then subsequently reheated. Bloomberg picked up on comments from the Brick Development Association that the industry had been asked about its ability to cut output.
Oil
Front-month Brent crude was down 26% from last week's intra-week high despite headwinds, including little progress in Ukraine-Russia talks, domestic pressure in Germany to cut imports of energy from Russia, and the unconfirmed US reports that China was willing to provide military support to Russia.
For markets, lower oil prices are a double-edged sword. While it should benefit consumer equity sectors, falling prices in a high vol environment could curtail risk-taking in other assets. The market continued to price out the worst-case scenario via Russia/Ukraine peace talks, notwithstanding the shortfall will be much smaller than anticipated even if the war goes on. So if it had been correct that progress was being made in talks to de-escalate the situation, then it would have been reasonable that some of the speculative heat would come out of oil this week.
News on Monday of tighter mobility restrictions in China due to the latest surge in COVID cases meant that weaker demand may take some of the heat out of oil markets. Though global demand was widely expected to return to pre-COVID levels this year, China is an important enough part of the worldwide demand picture that a new wave of lockdowns could prolong the recovery cycle.
Other than Russia/Ukraine talks and China lockdown, the rise of rigs drilling for crude in the US was another factor driving oil price slides this week.
Tighter monetary policy and increased margins on the futures market likely made oil speculation less attractive. And the necessary adjustments to global growth were feeding through oil prices that have already started the self-correction process as the options market showed clear signs of capitulatory demand for upside and hedges.
Still, none of the news stories making the rounds this morning featured material new information, and once again, the 7.5% drop in oil prices since this time yesterday morning was likely an indication of the speculative component in prices rather than a change in fundamentals.
Gold
Along the lines of my view that gold will be a good war hedge until it's not!
The very subjective so-called 'war premium' eroded overnight as gold investors turned more optimistic about a positive outcome from Ukraine looking possible (which has since faded). But even amid the fog of war, US bond yields took flight as there was a growing opinion that Wednesday's FOMC dot plot was likely to surprise to the upside, so the risk-reward of holding bullion with the Fed looking to hike rates to cool inflation has also taken some of the steam out of gold.
Central banks seemed undeterred by the events in Ukraine, and it appeared that the first order of business was to get their own house in order. On top of that, oil prices have likely seen this year's top as the market pares back long oil positions weakening a key inflationary trigger. The next level to watch on the downside for further capitulation is $1920, previously a strong resistance level.
Forex
Eur
Some of the constructive moods in EUR/USD perhaps had to do with weekend reports about 'EUR1.5-2 trillion' in funding put out by Italian PM Draghi, repeating what he used to do at the ECB: boost expectations.
As we suggested last week before the EUR/USD tanked on confusing ECB guidance, I was getting less bearish on the euro as I expected mutualized debt issuance would be between EUR200-400 bn, in my view. My best guess was the market was short euros given the ongoing Russia-Ukraine conflict. Accordingly, there was a risk of a further squeeze.
Intraday moves are tough to call, let alone day-to-day, so I think it best to remain flexible in FX markets ahead of the FOMC.
Yen
The Japanese yen typically struggles in March as foreign investors tend to be big sellers of Japanese stocks and bonds ahead of Japanese year-end, but it was compounded by higher US yields and stubbornly high energy prices this year. Inflation has been surging, which may force the BoJ's hands like other G-7 central banks. A weaker yen risks importing more inflation, so the BoJ needed to halt the yen's bleeding at some point.
And with energy prices cooling, and once the Fed is in the rear window, I think the yen will have room to breathe and strengthen even though the enthusiasm earlier in the year for some hints of BoJ normalization has waned a bit, partly because of the weak data flow.