Russian assets slammed following weekend sanctions imposed on Russia's central bank. Some spillover into European prices. EUR struggles. But risk sentiment improves from the poor Monday open

Markets have been volatile after weekend developments on the Russia-Ukraine war which included sanctions against Russia’s central bank. Weak risk sentiment at the start of Monday trading has given way, resulting in a recovery in global equities and the NZD and AUD have recovered significantly overnight. Bond yields have rallied, driven by the short end, as investors pare back expectations of policy tightening. Russian financial assets got slammed, with some spillover for those most exposed, including European financials and the euro.

The market remains focused on the Russia-Ukraine war, which is gripping the world’s attention. In overnight developments, talks between Ukrainian and Russian government officials held in Belarus began but there seems little hope for a peaceful resolution given the divergent demands between the two countries. Russian military forces bombarded Kharkiv, Ukraine’s second largest city. Russia sent more military forces towards Kyiv after meeting some fierce resistance.

After the weekend announcement of sanctions against Russia’s central bank, which will severely curtail the ability of the Bank to support the economy and Russian financial markets to function, exposures to Russian financial assets got hammered. Trading in the ruble was patchy and illiquid, with onshore markets frozen and markets outside Russia reluctant to trade the currency, but it fell as much as 20%. The Moscow stock exchange didn’t open for trading, but large Russian companies listed on the London exchange plummeted, including Sberbank down 72% and Gazprom falling nearly 50%. The yield on a USD Russian sovereign note rose from 5% to 25%. Russia’s central bank held an emergency meeting and lifted its benchmark rate from 9.5% to 20% to stem outflows.

Even with debt of only 20% of GDP, a default of Russian debt, now rated as junk, is considered a serious possibility. Offshore investors hold USD20b of Russian foreign currency debt and local debt worth more than 3 trillion rubles (around USD30b at the depreciated exchange rate).

Financials in the Euro Stoxx 600 index were the worst performing, down 2.7%.  The index itself was down nearly 2% in early trading before staging a recovery and finishing the day down by less than 0.1%, supported by 2.2% gain in Utilities on the back of lower rates. European 10-year rates fell in the order of 10bps for the day, with French and German 2-year rates down in the order of 14-15bps, as investors reined in expectations for ECB tightening this year.

S&P futures were down nearly 3% in early Asian trading, but sentiment improved during the night and the S&P500 actually nudged into positive territory at one stage, but is now back down 1% as we go to print. The 10-year Treasury rate is trading at 1.86%, close to its low for the session and down 10bps for the day. The 2-year rate has fallen even more, down 13bps to 1.44%, as traders pare back Fed tightening expectations – around 5½ hikes are still priced for this year as combatting the strong inflationary impulse is still seen as necessary for the Fed.

Brent crude traded at USD105 per barrel in early Asian trading, but has trended lower since, and is back down to around USD101, up 3% from last week’s close. Commodity prices still have an upside bias, with wheat up 8% and corn up 5%, two products heavily exposed to Russia-Ukraine developments.

In currency markets, movements make sense even though the ranking looks unusual, with safe havens CHF and JPY leading the gains since Friday’s close, but followed closely by the commodity currencies. Other European currencies, more exposed to the fallout from Russian assets, are weaker. As the week began with a risk-off tone, the NZD traded below 0.6660 in early Monday trading, but it has since recovered overnight, supported by better risk sentiment and the tailwind from commodities. It traded this morning at 0.6760. The AUD shows a similar pattern, up nearly a cent from its low to 0.7250.

With EUR down 0.5% at just above 1.12, NZD/EUR has made further gains, up to 0.6030, now fully recovering the loss it made through January. With GBP also on the soft side of the ledger, NZD/GBP has tracked up towards 0.5050.

In economic data, the US goods trade deficit blew out to a record high in January of $107.6b, as exports fell 1.8% y/y and imports rose 1.7%. The worse-than-expected data will see analysts shave down their Q1 GDP estimates, although an offsetting factor was higher inventory building. The Chicago PMI was also much weaker than expected, down 9 points to 56.3, increasing the chance that tonight’s ISM PMI is on the soft side as well.

The ANZ business outlook survey showed the expected slump in NZ confidence and activity indicators as Omicron took hold and businesses suffered through isolation rules that forced closures, alongside the lack of demand as consumers hunkered down. Both business and consumer confidence indicators are now close to recessionary levels, but the hope is that the Omicron wave will pass quickly. The government further relaxed isolation rules, this time for inbound kiwis from Australia, and brought forward the allowed date for those travelling from other countries to later this week. There is a good chance now that overseas tourists will be allowed into the country much sooner than previously indicated and without isolation rules, which will help support the economy later this year.

The domestic rates market continued to be buffeted by global forces, which saw yields lower across the bond and swaps curves, down about 3-4bps across 2-10 year maturities. The index provider provided provisional confirmation that NZGBs have qualified for the key WGBI. We expect them to enter the index towards the end of this year.

In the day ahead, China PMI data are expected to show further slippage in economic momentum in February, annual German CPI inflation is expected to show further upside pressure at 5.3% y/y while the US ISM manufacturing index is expected to gain slightly to 58.0, but now with downside risk. The RBA’s policy update is a dead-rubber, with the Bank awaiting further CPI and wages data and being “patient” with its on-hold policy view in the meantime.