Risk sentiment improved considerably on Friday night as the market digested developments on Russia’s invasion of Ukraine. US and European equities surged in the order of 2-3%. Germany’s 10-yr rate rose 6bps, while the US 10-year rate closed flat. The USD was broadly weaker, while commodity currencies and the euro showed decent gains. Over the weekend, more sanctions have been proposed against Russia, targeting its financial system and it looks like market volatility could continue for some time yet.
At the end of last week, the market remained fixated on Russia’s invasion of Ukraine. After the sell-off in risk assets earlier in the week, dip-buying investors returned, some confidence returning to the market due to sanctions imposed by western nations seen as fairly light touch and directed at Russia’s financial markets than the key oil and gas markets, and that the war was likely to be confined to Ukraine soil, without any spillover to surrounding NATO members. Russian gas was still following to EU countries that rely on such supply. That reliance on Russian energy sources, limits how far sanctions can go.
The initial round of sanctions avoided the removal of Russia from SWIFT which would have significant negative spillover effects for oil and gas markets and Europe’s banking system. Over the weekend a new development has been a more surgical approach – excluding only some Russian banks from SWIFT (those already sanctioned by the international community) and some direct punishment towards Russia’s central bank, making it more difficult to deploy its more than USD600bn in reserves to help Russia’s economy. This sets the scene for a plunge in the ruble, Russian assets and anything closely linked to them when trading begins.
In terms of the invasion itself, Russia is meeting some fierce resistance from Ukrainian fighters and a senior US defence official believes Putin will be frustrated by slow progress so far. Ukraine is still holding Kyiv and there is a plan for Russian and Ukrainian officials to meet for talks. Hopes for a peace negotiation would be optimistic though, as soon after the plan was announced Putin put Russia’s strategic nuclear forces on higher alert. The Pentagon sees this as an escalatory step that increases the risk of miscalculation.
Western countries are offering some indirect military support to Ukraine, like supplying aid and weapons and banning Russian aircraft from their airspace.
The recovery in risk sentiment saw the S&P500 up 2.2%, fully recovering the losses seen earlier in the week to finish the week up 0.8% overall. The Euro Stoxx 600 index rose 3.3%, fully recovering the previous day’s loss but still down 1.6% for the week.
Bond market movements were also consistent with better risk sentiment, with Germany’s 10-year rate rising most of the large euro area countries, up 6bps, and yields in the periphery up only 3-4bps. The US 10-year rate traded as high as 2.01%, before finishing at 1.96%, flat for the day, while the 2-year rate fell 1bp to 1.57%. US Treasuries have shown signs of consolidation over the past few weeks, despite the build-up and eventual invasion of Ukraine, suggesting that a war on European soil hasn’t affected the bigger picture on the inflation and policy outlook for the Fed so far. Fed Governor Waller said he favoured four rate hikes by the middle of this year and would endorse a 50bps move next month if inflation and employment data ahead of the mid-March meetings showed no sign of cooling. He added that it was far too early to judge what Russia’s attack on Ukraine meant for the US economy.
US economic data released were stronger than expected. Consumer spending jumped 2.1% m/m in January, after the Omicron-affected fall in December. With flat incomes, the savings rate fell sharply to an eight-year low of 6.4%. The final reading of the University of Michigan consumer sentiment survey was over a point stronger than the early
February reading, but still at a decade-low. The core PCE deflator rose by 5.2% y/y in January, in line with expectations following the heads-ups from the high CPI print released earlier in the month.
In currency markets, positive risk sentiment saw the USD and JPY underperform, with the USD BBDXY index down 0.5% for the day. The euro has been sensitive to developments in Ukraine recently, and it recovered by 0.7% to 1.1270. Commodity currencies outperformed, with positive risk sentiment more than offsetting the impact of broad-based falls in commodity prices, including wheat down 8%, corn down 5% and lower oil prices. Brent crude fell over 1% to just under USD98 per barrel, now well down from the peak just below USD106 traded on Thursday.
The NZD closed the week at 0.6745, up about 0.7% for the day, while the AUD was up 0.9% to 0.7225. Apart from some volatility (arguably not much more than usual), both currencies haven’t shown any ill-effects so far from the build-up to Russia’s invasion, as the market digests the offsetting risk appetite and commodity prices forces. For the month to date, the AUD and NZD have risen 0.8-1%, beaten only by NOK so far of the major developed currencies.
The domestic rates market was quiet on Friday. The short end of the swap curve faced ongoing pay-side pressure following the hawkish RBNZ MPS on Wednesday. Governor Orr was happy to repeat that hawkish tone in a speech at an economic forum and in media interviews. Longer dated yields continued to be driven by global forces and better risk sentiment saw upside pressure. NZ swaps closed at fresh highs for the cycle, with moves in the order of 6-7bps. NZGBs outperformed swaps, with yields up 3-4bps.
In the day ahead, the ANZ business outlook survey is expected to show much weaker activity and confidence levels since the last survey in mid-December, although it likely won’t capture the full impact of the current Omicron wave and the draconian isolation rules that forced business to shut down capacity. The year-ahead inflation expectations figure should also lift from the previous reading of 4.4%. On the global calendar, there are only second-tier global releases.
Economic events this week are likely to play second fiddle to further developments on the Russia-Ukraine war, but it is a fairly eventful week, with key releases including Chinese PMIs, euro area CPI data, and US ISM and employment data. The RBA offers another policy update tomorrow, while Fed Chair Powell gives testimony to lawmakers.
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1 Comments
In 2014, Russia annexed Crimea. Obama imposed sanctions. Russia did not yield, and soon it was "business as usual". The world watched as Putin supported Assad in Syria. The might of their army and airforce was on show.
Some six years later, Putin invades Ukraine, supposedly to help rid the country of right wing leaders who committed "genocide".Like a saving army, welcomed by a suffering nation.
But it was not to be, Ukranians fought for their homeland.
And if Putin thought that he had an armoured economy, Old Joe socked him below the belt with blows, like those given to Iran.
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