2022/02/15 (003) Column

Wall Street Rally Gains Steam, While USD Eases Back from Two-Week Highs. Chinese Yuan Gains Despite Easing Moves Last 24h, so that China Stocks Rise as PBOC Injects more liquidity!


Wall Street Rally Gains Steam

All three major US stock indexes regained ground on Tuesday, with the Dow Jones adding more than 400 points, S&P 500 up 1.5%, and Nasdaq surging over 2% as concerns of an imminent war in Europe eased. Russian Defence minister’s said that some Southern and Western military districts units have completed their exercises and started returning to bases, signalling some de-escalation of the military build-up on Ukraine’s border. Aside from the Russia-Ukraine crisis, investors continue to digest the Fed’s narrative of a looming policy tightening cycle. They are now awaiting the FOMC minutes on Wednesday for clues about the timing and scale of future rate hikes. Gains were most pronounced in the industrials and financial sectors, while heavyweight energy stocks came under heavy selling pressure due to a sharp drop in oil prices.

Dollar Eases Back from Two-Week Highs

The dollar index bottomed around the 96 level, moving away from a two-week peak of 96.44 touched in the prior session as the risk-on mood, backed by easing geopolitical tensions involving the West, Russia, and Ukraine, spooked investors away from the safe-haven currency. Russian foreign minister said that while large-scale drills across the country continued, some Southern and Western military districts units have completed their exercises and started returning to bases. Putting a floor under prices were recent remarks from Louis Fed president James Bullard that the central bank needs to be aggressive in fighting inflation after calling for a 100bps in an interest rate hike by July. Investors now await the FOMC minutes on Wednesday and speeches from several Fed officials this week for fresh clues on the timing and magnitude of rate hikes.

Bond Sell-off Resumes

The global government bond sell-off resumed on Tuesday in anticipation of a looming policy tightening cycle, with major central banks seeking to tame inflation and cool a rapidly growing economy. The US yield on the 10-year note, which sets the tone for corporate and household borrowing costs worldwide, jumped once again above 2%, closing in on its strongest level since 2019 after Fed’s James Bullard reiterated his call for 100bps in interest rate hikes by July 1. Meantime, Germany’s 10-year Bund yield, the benchmark for the region, was up three basis points at 0.298%, the highest since December 2018. Italy’s 10-year yield, an influential gauge of risk in eurozone bond markets owing to the vast scale of Italian debt, widened to more than 1.96 percentage points, the most since April 2020.

Oil Eases from Multi-Year Highs

Oil markets came under pressure on Tuesday, with WTI futures losing as much as 5% to below $91 per barrel as tensions on the Russia Ukraine border started to deescalate. While large-scale drills across the border continued, Russia pledged that some Southern and Western military districts units have completed their exercises and started returning to bases. Putting a floor under prices were signals that OPEC and its allies have been struggling to meet output targets despite pledging to increase production by 400,000 bpd until March. Last week, the IEA pointed out that the shortfall of OPEC+ output from its target widened to 900,000 bpd in January. Meanwhile, investors continued to watch talks between the US & Iran closely, as a potential deal could release about 1.3 million supply barrels.

China Stocks Rise as PBOC Injects Liquidity

The Shanghai Composite rose 0.5% to close at 3,446 while the Shenzhen Component gained 1.69% to 13,346 on Tuesday, as mainland stocks got a boost after the central bank injected more liquidity to shore up economic growth. The People’s Bank of China injected a net 100 billion yuan into the banking system with its medium-term lending facility, while leaving the borrowing rate unchanged. This followed a net 200 billion yuan in MLF loans last month when the PBOC cut the 1-year policy rate by 10 bps to 2.85%, sending a strong signal that the central bank is willing to keep supportive liquidity conditions.

Chinese Yuan Gains Despite Easing Moves

The offshore yuan strengthened past 6.36 per dollar on Tuesday even after the central bank injected more liquidity into the financial system to boost growth. The People’s Bank of China injected a net 100 billion yuan into the banking system with its medium-term lending facility, while leaving the borrowing rate unchanged. This followed a net 200 billion yuan in MLF loans last month when the PBOC cut the 1-year policy rate by 10 bps to 2.85%.