WORLDWIDE: HEADLINES
Surging Prices Nudge Asia’s Reluctant Central Bank Hawks Off The Sidelines
Some Asian central banks are shaking off their long-held reluctance to follow their global peers in lifting benchmark interest rates off historic lows, as the Ukraine war blows consumer prices well out of policymakers’ comfort zones.
The region’s economies have largely lagged U.S. and European reopenings from the pandemic and central banks in Australia, India and Southeast Asia have up until now mostly looked past the inflation pressures caused by global supply snags, and focused more on shoring up their recoveries.
This week, however, there has been a marked shift in the language of some of the region’s less hawkish central banks on worries the renewed surge in commodity costs caused by Russia’s invasion of Ukraine could destabilise their economies.
Australia’s central bank on Tuesday dropped a previous pledge to be “patient” in its assessment of current conditions, taken widely as a signal that the door was now open to the first interest rate increase in more than a decade.
Reserve Bank of Australia (RBA) Deputy Governor Michele Bullock said on Wednesday the change in the policy outlook reflected growing evidence of inflation pressures.
“It seems external inflation dynamics have become enough for the RBA to pre-emptively flag a shift,” said Ben Jarman, an economist at JPMorgan.
“The RBA guidance suggests upcoming consumer price index and labour cost data are likely to clinch the case for normalisation,” he said, projecting the first rate hike to come in June from the previous forecast for November.
Setting the global pace, the U.S. Federal Reserve raised rates for the first time since 2018 last month and looks on track for an aggressive tightening cycle to fight surging inflation.
In the Philippines, central bank governor Benjamin Diokno said on Tuesday he was ready to take “pre-emptive action” if “inflation expectations” risked becoming “disanchored.”
His comments contrast with more passive remarks in March about being “ready to respond” and follow data that showed consumer inflation nudging the upper end of the central bank’s projected range. Analysts currently expect the bank to raise its benchmark interest rate in the second half of this year.
Full coverage: REUTERS
Russia Edges Close To Default On Debt, Puts Roubles Aside For Bondholders
Russia edged closer to a potential default on its international debt on Wednesday as it set aside roubles to pay holders of international bonds that need to be repaid in dollars and said it would continue to do so as long as its foreign exchange reserves are blocked by sanctions.
The United States on Monday stopped Russia from paying holders of its sovereign debt more than $600 million from frozen reserves held at U.S. banks, saying Moscow had to choose between draining its dollar reserves at home and default.
Russia has not defaulted on its external debt since reneging on payments due after the 1917 Bolshevik Revolution, but its bonds have remerged as a flashpoint in the diplomatic crisis and sanctions tit-for-tat between Moscow and western capitals.
“This speeds up the timeline around when Russia runs out of space on willingness and ability to pay,” one fund manager holding one of the bonds due for payment on Monday said.
The Kremlin said it would continue to pay its dues.
“Russia has all necessary resources to service its debts… If this blockade continues and payments aimed for servicing debts are blocked, it (future payment) could be made in roubles,” Kremlin spokesperson Dmitry Peskov said.
Moscow has managed to make a number of foreign exchange coupon payments on some of its 15 international bonds with a face value of around $40 billion outstanding before the United States stopped such transactions.
While sanctions have frozen roughly half of $640 billion in Russia’s gold and foreign currency reserves, the country still receives billions of dollars from exporting crude and gas.
Russia’s finance ministry said on Wednesday it had to pay roubles to holders of its dollar-denominated Eurobonds maturing in 2022 and 2042 as a foreign bank had refused to process an order to pay $649 million to holders of its sovereign debt.
The finance ministry said the foreign bank, which it did not name, rejected Russia’s order to pay coupons on the two bonds and also did not process payment of a Eurobond maturing in 2022.
Russia’s ability to fulfil its debt obligations is in focus after sweeping sanctions in response to what Moscow calls “a special military operation” in Ukraine have frozen nearly half of its reserves and limited access to global payment systems.
Full coverage: REUTERS
WORLDWIDE: FINANCE/BUSINESS
Asian Shares Slip On Hawkish Fed, Dollar Stands Tall
Asian shares retreated on Thursday in line with a global selloff, as markets were spooked by more aggressive noises from U.S. policymakers about the need for tighter monetary policy, which also kept the dollar near a two-year peak.
MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) fell 0.53% and Japan’s Nikkei (.N225) dropped 1.9%.
“The whole political and policy stance in the U.S. has shifted, and markets are starting to get that,” said Redmond Wong, a market strategist at Saxo Markets Hong Kong.
“Attention has really moved towards quantitative tightening after all those Fed speakers and the minutes yesterday, and the objective is to tighten financial conditions and depress aggregate demand. I think the Fed is willing to accept some softness and wants to cool down the labour market, unlike in the past they wanted to protect it.”
Minutes of the Fed’s March 15-16 meeting released Wednesday, showed deepening concern among policymakers that inflation had broadened through the economy.
U.S. Federal Reserve Governor Lael Brainard said on Tuesday she expects rapid reductions to the central bank’s balance sheet.
Wong said that in the long run positive real interest rates would be good for the global economy, but in the medium term there would be a repricing of assets.
Overnight all three major U.S. benchmarks fell with the Nasdaq Composite (.IXIC) worst hit, losing 2.22%. In Asia trade S&P 500 futures fell 0.26% and Nasdaq futures fell 0.22%.
Also on investors’ minds was the situation in China, which is grappling with a new outbreak of COVID-19.
Shanghai, currently under a city-wide lockdown, reported nearly 20,000 new cases on April 6 – the vast majority asymptomatic – the local government said on Thursday.
Chinese blue chips (.CSI300) shed 0.4%, although the Hong Kong benchmark (.HSI) was flat, buoyed by mainland developers (.HSMPI) after local governments eased restrictions on the property sector.
U.S. Treasuries had sold off sharply in the lead-up to the release of the Fed’s minutes before steadying.
Full coverage: REUTERS
Dollar Buoyant As Fed Readies To Step Up Inflation Fight
The dollar hovered near a two-year high against a basket of currencies on Thursday, after meeting minutes showed the Federal Reserve preparing to move aggressively to head off inflation.
The U.S. dollar index , which measures the greenback against six majors, touched its highest since May 2020 overnight at 99.778 and held nearby at 99.575 in early Asia trade.
Commodity currencies retreated from recent highs as oil prices have dipped and the euro touched a one-month trough of $1.0874. It recovered to $1.0911 in morning trade.
Minutes from the Federal Reserve’s March meeting showed “many” participants prepared to raise interest rates in 50-basis-point increments at coming meetings.
They also showed general agreement about cutting $95 billion a month from asset holdings which had ballooned during the pandemic. That was more or less in line with market expectations, but policymakers preparedness to begin as soon as May was confronting and will likely keep the dollar elevated.
“The market has been slow to accept the reality that quantitative tightening is coming much sooner than previously expected,” said Brent Donnelly of analytics firm Spectra Markets.
“This should keep stocks heavy and the dollar supported into the May 4th Fed meeting,” he said.
Minutes from the European Central Bank’s March meeting, due later in the day, are unlikely to include such hawkish plans, though they could offer insight into policymakers’ delicate balancing act to manage soaring inflation and slowing growth.
The Fed’s tone seemed to offset a hawkish shift from Australia’s central bank earlier in the week and the Aussie was pulled down by about 0.8% overnight to sit at $0.7503. The kiwi sat at $0.6905.
The stronger greenback had the yen hovering near a one-week low at 123.64 per dollar. Sterling was pinned at $1.3076.
Full coverage: REUTERS
Oil Gains $1 As Emergency Oil Release Seen As Band-aid
Oil prices clawed back some losses on Thursday after tumbling more than 5% to a three-week low in the previous session after consuming nations announced a huge release of oil from emergency reserves to offset supply lost from Russia.
Brent crude futures climbed $1.32, or 1.3%, to $102.39 a barrel at 0119 GMT, while U.S. West Texas Intermediate (WTI) crude futures rose $1.18, or 1.2%, to $97.41 a barrel.
International Energy Agency member countries agreed to release 60 million barrels on top of a 180 million-barrel release announced by the United States last week to help drive down prices in a tight market following Russia’s invasion of Ukraine.
Russia calls its actions in Ukraine a “special operation” to disarm its western neighbour.
Analysts said even with the emergency oil stocks release, supply remained tight.
“In addition to the enormous global reserves release, demand destruction and recession are currently the only price-lowering mechanism in a world devoid of inventory buffers,” said Stephen Innes, managing director of SPI Asset Management.
National Australia Bank analyst Baden Moore said the latest release plus the IEA’s coordinated release announced on March 1 equates to 1 million barrels per day in extra supply from May to the end of 2022, which would cap prices in the near-term.
“The additional supply reduces the near-term upside risk to the market and likely avoids the need for refinery cuts in the near term,” Moore said in a note, before adding a note of caution, “but the need to restock reserves, expected in 2023, adds to the forward market tightness where the fundamental supply outlook remains unchanged, tilting the price risk to the upside.”
Stalled indirect talks between Iran and the United States on reviving a 2015 agreement on Tehran’s nuclear program have further delayed the potential for sanctions on Iranian oil to be lifted, keeping the market tight.
Full coverage: REUTERS
