Summary: Markets were spooked on Friday by US intelligence sources warning of an imminent Russian invasion of Ukraine. This triggered position squaring in risky assets as stocks moved and closed sharply lower and safety seeking in US treasuries, the US dollar, and especially the Japanese yen. Oil spiked to fresh new highs with gold jumping as well. Headline risks from this issue will likely continue to dog markets until signs of an easing of tensions are firmly in place. Meanwhile, markets were already roiled by high US inflation data last week, and the intense focus on the next Fed steps will continue this week
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities were trying to fight back on Friday despite all of the fresh pricing of a steeper pace of Fed rate hikes late last week, when the US warnings on a possible Russian invasion of Ukraine spooked risk sentiment late in the session, seeing a sharp sell-off in the close. The key indices remain in limbo technically between important resistance at the 200-day moving average in the Nasdaq 100 just above 15,000 and pivotal support near 14,000, while similar levels for the S&P 500 index are 4,585 top the upside and the 4,300 area to the downside. Markets will likely prove jumpy on headline risks for everything Russia-Ukraine related after Friday’s move.
Hang Seng (HK50.I) - It was a risk-off session in Hong Kong (Hang Seng -1.25%) and China A-Shares (CSI 300 -0.45%) by mid-day. Selling was across-the-board. As suggested in Saxo’s Q1 2022 outlook, upstream energy stocks are having strong tailwind in an environment of high inflation, supply deficits, lack of capex and heightened geopolitical tension. PetroChina (857.HK) and CNOOC (883.HK) rose 3.14% and 1.51% respectively. In its monetary policy report released last Friday, the PBoC emphasized ensuring steady growth in aggregate financing and guiding financial institutions to provide support to key industries and weak links of the economy. All 31 provinces, municipalities, and autonomous regions in China have released their 2022 GDP growth targets. Most of them are above 5.5% and nine of them target at above 7%. Overall, targets are set at levels below the actual growth rate in 2021.
US dollar pairs – the US dollar did see some strengthening in the wake of the hot US CPI data last week, together with St. Louis Fed president Bullard’s musings on the Fed needing to hike 100 basis points before mid-year, but the move was modest relative to the sharp Fed repricing, suggesting a difficult path higher for the greenback merely from repricing Fed expectations. The US warnings on a possible imminent invasion of Ukraine late Friday demonstrated that the US dollar remains a safe haven currency for now, although playing second fiddle to the Japanese yen, which outperformed as bond yields dropped on Friday.
USDJPY and JPY crosses – the action Friday showed clearly once again that the JPY is the most sensitive currency to safe haven seeking when a deleveraging wave hits markets like it did on Friday. As US longer treasury yields absorbed a sudden bid, so did the JPY, with the move coming just after the Bank of Japan announced that it would buy “unlimited” amounts of 10-year JGB’s in today’s auctions on Friday to defend its 0.25% cap on 10-year Japanese Government Bond yields after this level was nearly tested last week. With yields pushing lower elsewhere, this avoids any pressure on the Japanese currency. As the source of the concern (Russia-Ukraine) is contiguous to Europe and the market has recently seen the ECB guidance that it will revise its policy outlook at the March meeting as hawkish, the correction in EURJPY was particularly brutal. In the near term, the JPY is likely to trade as a proxy for “risk-on, risk-off" behaviour, while longer term the direction of global sovereign yields will be an important coincident indicator to watch (higher yields=weaker JPY and vice versa).
Crude oil (OILUSMAR22 & OILUKAPR22) stayed bid in Asia after geopolitical tensions over Ukraine boiled over on Friday. Over the weekend, talks between Biden and Putin failed to calm tensions with the market worried about the impact on global supplies should exports from one of the world's largest exporters be impacted by the conflict. Oil spreads remain severely backwardated on supply concerns with physical Brent barrels on Friday trading more than two dollars above the front month futures contract. Apart from following developments in Ukraine, the market will also be watching a potential response from the other major oil producers with oil near $100 may threaten the global economy.
Gold (XAUUSD) jumped on Friday as worries about a Russian attack on Ukraine boiled over. While a safe-haven jump usually tends to be short lived, unless an escalation is seen, gold may find some additional support from macro-economic developments with oil near $100 keeping inflation elevated for longer while at the same time hurting global growth thereby potentially reducing the number of future rate hikes. US consumer sentiment took a knock last month (see below). Gold reached a $1865 high on Friday before drifting lower overnight. For the rally to have further legs to go on support now needs to be established ahead of $1835 while resistance above $1865 is the November high at $1877.
US Treasuries (TLT, IEF). The US yield curve steepened slightly on Friday as the White House warned that a Russian attack on Ukraine could happen any day. Ten-yield yields fell below 2%, and 2-year yields dropped below 1.5%. However, a war in Ukraine translates into sanctions against Russia, further increasing energy prices adding worries to inflationary pressure. Therefore, the Federal Reserve might need to be more aggressive into hiking interest rates. Such a scenario would translate into an inevitable inversion on the yield curve as long-term yields will be compressed by war in Ukraine, and the front part of the yield curve will continue to rise to reflect rate hikes expectations. This week’s focus is on Wednesday’s FOMC minutes and Fed’s speakers, many of which are ghosting members this year.
UK Gilts (IGLT). Jobs figures, inflation data and retail sales numbers are all released this week. The focus is whether they can increase the aggressiveness of the BOE. Currently the market is pricing 130bps of rate hikes this year, below the 165bps markets are pricing in the US. As the markets adjusts to the new hawkish positions I the Fed and the ECB, Gilts yields might resume their rise. The yield curve is likely to continue to bear-flatten, while shifting higher.
European sovereigns (VGEA). In the European sovereign space, the focus is going to be on geopolitical tensions. Olaf Scholz is in Kyiv today and tomorrow in Moscow. Also, ECB’s Lagarde will speak this afternoon. The market is going to focus on the BTP-Bund spread and any clue of interest rate hikes for this year.
What is going on?
US warnings on Russian invasion of Ukraine spook market Friday – stern warnings from US intelligence sources of a Russian invasion of Ukraine that could start this week triggered a sharp deleveraging move late on Friday, with that saw investors squaring positions and seeking safety in sovereign bonds, the US dollar and even more so the Japanese yen, and dumping stocks. The Russian ruble spiked lower. The markets remain in a nervous mood in Monday’s early trading as many markets trade near Friday’s closing levels. Russia has denied any plans to invade. Talks between Russian president Putin and US President Biden brought no apparent change to the temperature as we await developments.
U.S. consumer sentiment falls to a fresh decade low on inflation. The University of Michigan gauge slumped to 61.7 in February (preliminary report) versus 67.0 expected and 67.2 in January. Both the current conditions and the expectations deteriorated, at 68.5 and 57.4, respectively. The report indicates: “the recent declines have been driven by weakening personal financial prospects, largely due to rising inflation, less confidence in the government's economic policies, and the least favorable long term economic outlook in a decade”. Long-term inflation expectations, which are closely monitored by the market, remain anchored at 3.1 %, unchanged from January’s level. But the one-year inflation expectations continue to rise, at 5.0 % versus prior 4.9 %. This is the highest level since July 2008. The inflation headache will not disappear anytime soon in the United States.
Russia’s importance as a major supplier of commodities to the global economy was exposed on Friday when tensions over Russia’s military buildup near Ukraine boiled over, thereby raising the risk of supply disruptions. Russia’s exports as a share of global production are below 5% for silver, copper, coal and aluminum, between 5% and 10% for wheat, nickel, gas, oil and gold while above for platinum and not least palladium where the figure is close to 45%.
What are we watching next?
Russia-Ukraine headlines. These can emerge from anywhere, with the recent US warnings on the likelihood of a Russian invasion of Ukraine sounding increasingly shrill, while Russia has denied any intents to do so. German Chancellor Scholz will travel to Kyiv today and will meet with Russian president Putin tomorrow in Moscow.
Watching next signals from the Fed – after another multi-decade highs in the US CPI data series last week and hawkish talk from FOMC voter Bullard, many are speculating that the Fed could move to hike rates between meetings for the first time since 1994, though the subsequent nervousness triggered by Russia-Ukraine concerns has seen Fed tightening expectations adjusted somewhat lower. The market was pricing as high as 46 basis points of rate hikes through the March 16 FOMC meeting on Friday before this dropped to under 40 basis points, Still, if the Fed fails to hike rates 50 basis points by then (whether a surprise 25 bps hike between meetings followed by another 25-bps hike at the March meeting or 50 bps all at once at the meeting) would be seen as dovish relative to expectations, something the Fed is unlikely to want to deliver. This week’s Fed calendar includes Bullard out speaking in a TV interview today, the minutes of the last FOMC meeting up on Wednesday, and voters Bullard and Mester out speaking on Thursday, and voter Williams speaking on Friday.
Earnings Watch. Earnings season rolls on this week, with a number of interesting names on the docket for the week ahead, including mining giant BHP up Tuesday, two big semi-conductor names Applied Materials and NVidia, US retail giant Walmart, which may offer interesting comments on the state of the US consumer, and US agricultural machinery specialist Deere at the end of the week.
Economic calendar highlights for today (times GMT)
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