US EARLY MORNING: Equity futures are trading lower, bonds are bid; Ukraine/Russia caution, China COVID resurgence ahead of Wednesday's FOMC

EQUITIES: APAC equities declined overnight, with losses pronounced in China where COVID cases jumped; the European day started defensively amid glacial progress in Russia/Ukraine talks, and after reports that Russia had taken the Kherson region, where a key Black Sea port is located. US equity futures are lower by 0.5-1.0% (NQ -0.5%, ES -0.6%, YM -0.7%, RTY -1.0%). The ‘hope’ theme is worth monitoring: US benchmarks were more resilient at the start of the conflict, underpinned by a view that the US had less exposure to Ukraine; Capital Economics notes that US equities Monday underperformed amid hopes of a geopolitical breakthrough, and said that "if meaningful progress is made, we think this underperformance could gather pace as the risk premium on rest-of-the-developed world equities unwinds and the 10-year TIPS yield gradually climbs further after its surge Monday".

TREASURIES: Treasury yields are lower by 3-4bps, with the rally most concentrated in the belly; major curve spreads are biased towards steepening by 1-2bps. There has been a gradual bid since the overnight session, with-some citing Ukraine/Russia slow progress, while others cite caution ahead of Wednesday’s FOMC–where a +25bps rate hike is expected (our preview here)– after yields Monday jumped, seeing 2yr yields rise to fresh multi-year highs on expectations the Fed would be aggressive in tackling inflation.

DOLLAR: The cautious risk set-up in the European morning has not resulted in any meaningful USD bid; in fact, the Greenback trades around three-tenths lower, with the DXY at 98.81. Overnight, USDJPY continued its march higher, supported by yield differentials and an unwind of haven premium; Japanese officials again said they were monitoring FX levels closely, but analysts do not foresee any intervention yet. The EUR continues to find support, rising back towards 1.10, amid hopes of peace on Monday, as well as ECB monetary policy, where the central bank will end bond buying in Q3; Commerzbank’s analysts told clients to sell Bund recoveries, noting that Monday’s sell-off in German debt was driven by the long-end. The SEK – which traders have used as a proxy for geopolitical sentiment – is up around two-tenths against the USD, but is trading lower by around the same margin vs the EUR. There isn’t a lot of joy in other G10 activity currencies, while EMFX is not exhibiting much strength either. China’s yuan weakened despite decent China activity data for January (backwards-looking), with the resurgence in COVID cases getting more attention; there is more chatter among market desks speculating about the PBOC continuing to loosen policy ahead, while HSBC told its clients that the Yuan's overvaluation and reduced yield advantage should weigh on the FX expectations and hedging behaviour of corporates and portfolio investors.

CRUDE: Major oil benchmarks are down by USD 5.50-6.00. The demand-side is being knocked by the resurgence of COVID in China, and some regional lockdowns. On the supply side, there is a feeling the Ukraine/Russia talks are moving towards de-escalation, although tangible progress remains to be seen, but Urals prices continue to slide amid the market 'self-sanctioning' purchases. On the Iran front, Russian Foreign Minister Lavrov (whose nation reportedly held up the nuclear talks on demands that it should gain sanctions exemptions with Iran as part of the deal) said an agreement on the revival of the Nuclear deal was on the "finishing straight".

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15 Mar 2022 - 09:39- EquitiesResearch Sheet- Source: Newswires

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