Asia Pacific Macro – February 24, 2022

| February 24th, 2022

Today it will be short and primarily focused on the aftermath of the Russian attack in Ukraine.

  1. CENTRAL BANKS

1.1 BOK freezes key rate, announces decade-high inflation outlook – Korea Herald

South Korea’s central bank on Thursday kept its benchmark interest rate anchored at the current 1.25 percent, but sharply revised its annual inflation outlook to a decade high of 3.1 percent.

The Bank of Korea’s seven-day monetary policy board unanimously voted to freeze the key rate at the level it maintained since it delivered a 0.25 percentage point rate hike in January. The January decision brought back the base rate to pre-pandemic levels, before the BOK carried out a 0.5 percentage point rate cut to 0.75 percent in March 2020 and another 0.25 percentage point cut to a record-low of 0.5 percent two months later to cope with COVID-19 pandemic woes. It ended the record-low interest rate in August last year by raising the rate to 0.75 percent in August, followed by two additional rate hikes in November 2021 and January this year.

“It will be appropriate to continue adjusting the pace of monetary easing, with the prolonged high inflationary pressure and the need to resolve financial imbalance,” BOK Gov. Lee Ju-yeol said, hinting at further rate hikes in a press briefing tied to the policy meeting.

Nodding to the upward inflationary pressure, the BOK raised its annual inflation outlook by 1.1 percentage points from its previous November reading to 3.1 percent. This marks the highest reading in a decade since the 3.2 percent outlook announced in April 2012.

The BOK said that that consumer price inflation has recently remained high in the mid- to upper-3 percent range due to the ongoing sharp rise in the prices of petroleum products, as well as the accelerating increase in the prices of personal services and industrial products. Government data showed that consumer prices gained 3.6 percent on-year in January, hovering over the 3 percent mark for fourth consecutive months.

The surging global oil prices, the prolonged global supply bottleneck and the mounting tensions between Russia and Ukraine have been key factors driving up the inflationary pressure. Lee said that a full-blown conflict in the central European region could further affect the inflation here.

Comment: Hard to say whether the pause in the rate hike was already planned or de facto forced by the current events. Their concern for inflation, and specifically when it comes to energy, is more than warranted, although it is hard to see what they could do about it (as it is beyond their control).

2. UKRAINE

2.1 Markets on war footing as Russia invades Ukraine – AFR

Global markets are bracing for all-out war between Russia and Ukraine, sending Brent oil past $US100 a barrel on Thursday and unleashing a sell-off in global equities that pushed Australian shares to their biggest single-day loss since September 2020.

Investors dumped risk assets and rushed to the safety of bonds as the scale of Russia’s military objective became apparent.

Brent futures for April spiked above $US100 a barrel for the first time since 2014 to $US101.32, up 4.6 per cent at the closing bell in Sydney. Sky-high energy prices mean higher inflation and slower growth – a deadly cocktail for equity markets.

The S&P/ASX 200 Index tumbled 3 per cent, wiping $73 billion from the local bourse, in its worst day since the Nasdaq shake-out 17 months ago. Wall Street futures suggested the Nasdaq would enter a bear market at the resumption of trading in the US on Thursday, and the main US benchmarks were priced for falls of 2 per cent.

The Moscow Exchange issued a one-line statement suspending all trading “until further notice”.

Comment: The ASX, and all other major indexes, have turned negative today and more pain may come (as highlighted by Nicholas Glinsman in his piece yesterday).

In Japan, the 225-issue Nikkei Stock Average ended down 478.79 points, or 1.81 percent, from Tuesday at 25,970.82, its lowest closing level since Nov. 20, 2020. The broader Topix index of all First Section issues on the Tokyo Stock Exchange finished 23.50 points, or 1.25 percent, lower at 1,857.58.

In South Korea, the benchmark Korea Composite Stock Price Index (KOSPI) tumbled 70.73 points, or 2.6 percent, to close at 2,648.80 points. Trading volume was high at about 904 million shares worth some 13.1 trillion won (US$10.9 billion), with losers outnumbering gainers 797 to 108. Foreigners dumped a net 681 billion won, and foreigners offloaded 485 billion won, while retail investors bought 1.1 trillion won.

There is also something else, which however warrants a specific article.

2.2 Chinese buyers hesitate to procure Russian coal amid Ukraine conflict: sources – S&P Global

Some buyers in China have been advised by banks and higher authorities to refrain from procuring Russian coal due to possible sanctions amid Russia’s invasion of Ukraine, sources told S&P Global Platts Feb. 24.

Market participants globally are cautious about trading Russian coal after sanctions were imposed on Russian banks and high-level officials after Moscow escalated its conflict with Ukraine Feb. 21.

On Feb. 24, Russian President Vladimir Putin approved military operations in eastern Ukraine.

“It seems like some Chinese state-owned enterprises are staying away from Russian coal for the moment. I tried to sell Russian coal to a state-owned group, and they cited the invasion and said they were instructed to stay away from it for the time being,” a South Korea-based trader said.

Another China-based trader added that banks were heard warning traders against procuring Russian coal. Sources said that ship owners were warned against commuting to Suek port and traders were wary of docking at the port.

While some pointed towards advisories by banks and authorities, others said that the price of Russian coal was already uncompetitive in Chinese markets.

Sources said that an official communication had not been issued and that further clarity was awaited.

Comment: This news is very interesting, as Chinese SoEs would not do anything like this without consulting with Beijing first. This means that, while the Foreign Ministry is still trying its balancing act, someone high enough in the CCP is starting to take measures.

3. TRADE

3.1 Free Trade Agreement: India to finalise terms of FTA with Gulf Cooperation Council soon; talks with Canada in March – Financial Express

Close on the heels of its free trade agreement (FTA) with the UAE, India has expedited the pace of talks with several partners, including other members of the Gulf Cooperation Council (GCC), Australia, the UK and Canada, to firm up a raft of “fair and balanced” trade deals and enable domestic exporters to take advantage of a rebound in global growth.

Official sources told FE that the country will likely get into a pact with the GCC nations in the next fiscal. Both the sides will finalise the terms of reference (ToR) in March. The comprehensive economic partnership agreement (CEPA) with the UAE will serve as a template for the fast conclusion of this deal. In fact, some of these nations want to sign a pact at the earliest. Interestingly, the GCC group had dithered on whether to seal an FTA with India a decade ago. It comprises Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE.

Official sources told FE that sources said Canadian trade minister Mary Ng will likely visit India on March 11 to hold talks with commerce and industry minister Piyush Goyal and revive the FTA negotiations.

Goyal held talks, via video conference, with his Australian counterpart Dan Tehan again on Monday to “tie any loose ends” to an interim trade agreement that is at an advanced stage of fruition. This is to be followed up with a broader FTA with Australia. This would be the second deal to be signed by India, after its CEPA with the UAE, which was, in fact, New Delhi’s first shot at an FTA in over a decade.

Similarly, negotiations with the UK are progressing well, said one of the sources. India has also started talks with Israel for a trade pact.

The negotiations are a part of India’s broader strategy to sign “balanced” trade agreements with key economies and revamp existing pacts to boost trade. The move gained traction after New Delhi pulled out of the Beijing-dominated RCEP talks in November 2019.

Comment: While the timing may be unfortunate, improved trade relations between India and the broad Gulf Cooperation Council could help both sides in stemming the effects on the commodity markets.

On the one hand, India could provide agricultural products to the GCC, assuming the Indian production will be able to compensate for any losses in the Russian and Ukrainian imports.

On the other hand, the GCC would be able to provide oil and gas to India, assuming once again that their production will be able to compensate for any losses in the Russian imports (especially of gas).

In any case, as stated by former RBI governor Raghuram Rajan, commodities will be a major cause of concern and a risk for the post-pandemic recovery.