Markets highly volatile as investors weigh up Russian oil embargo; Germany rejects that prospect. Stagflation worries; higher inflation expectations push global rates higher while equities much weaker

Market volatility has continued in response to the war in Ukraine, with some extreme moves in commodity markets unnerving investors. Germany ruled out a Russian oil embargo, seeing a turnaround in some markets. Oil prices are well down from the heights during Asian trading and the NZD is down almost a cent from yesterday’s high. Global equities are down for the day, while global rates have pushed higher on higher inflation expectations.

Oil prices surged on the Asian open in response to the weekend news that the US and its allies were considering a co-ordinated ban on imports of Russian oil, which would put a further squeeze on an already very tight oil market. Brent crude futures spiked up to USD139 on the open, before settling down.

In news overnight, EU members are divided on whether to join the US in a Russian oil embargo, with German Chancellor Scholz ruling out restrictions. The EU imports about 4m barrels per day of Russian crude and refined products, while the US is much less reliant, importing about 700,000 barrels per day. EU leaders will be meeting later this week and will be discussing a pledge to phase out the bloc’s reliance on Russian fossil fuels. Brent crude has fallen back to currently trade at USD123 per barrel, still up 5% from last week’s close.

Other commodities continued to surge higher, spanning palladium, copper, aluminium, European natural gas (all at record highs), nickel, wheat and others, before falling back after Germany rejected the call for an oil embargo.  Gold prices broke up above USD2000 an ounce for the first time in eighteen months before settling under that figure. Price swings for some commodities were wild overnight. European natural gas broke up through the €300 M/Wh mark, before settling just over €200. Pre-invasion, this was trading at €75 and a year ago it was around €16, highlighting how much of a cost impost higher natural gas prices will be on the euro area economy.

Reuters reported comments from a Kremlin spokesman that Russia has told Ukraine it is ready to halt the so-called special military operation “in a moment” subject to a list of demands: Ukraine ceasing military action, changing its constitution to enshrine neutrality, acknowledging Crimea as Russian territory and recognising the separatist republics of Donetsk and Lugansk as independent states. Ukrainian and Russian officials are meeting for a third round of talks, but hopes for progress remain low.

Global equities remain in a slump as investors factor in the prospect of a weaker global growth outlook as higher commodity prices bite.  Stagflation and recession risks in the face of surging energy prices is the talk of the town. The UK’s NIESR warned that Britain is heading for a recession in the second half of the year if energy prices remain at current levels. The strong inflationary backdrop puts central banks in a difficult position, but likely keeping the pressure on tighter monetary policy to avoid a repeat of the 1970s. The S&P500 has trended lower since the open and is currently down over 2%. The Euro Stoxx 600 index was down nearly 4% just after the open and ahead of Scholz’s comments rejecting an oil embargo, before closing down “only” 1.1%.

Higher inflation expectations have been the predominant driver of global bond markets, with 10-year break even inflation rates reaching record highs in the US (2.78%) and Germany (2.63%). The US 10-year rate is currently up 1bp from Friday‘s close to 1.74%, and well up from the 1.67% low during Asian trading yesterday afternoon. Germany’s 10-year rate is up 5bps while the UK 10-year rate is up 10bps.

Currency markets have had a wild session. There was some “panic buying” of the NZD and AUD during NZ trading hours as commodity prices surged. The NZD broke up through 0.69 and traded to 0.6925 by afternoon tea-time. At this point it was looking over-bought, with the technical RSI hitting 70. Some selling pressure emerged and the fall was reinforced by the swing back down in commodity prices. The currency has pushed below last week’s NY close and now sits down 0.5% for the day around 0.6830. The AUD showed a similar pattern and, after trading up at 0.7440, has slumped back down to 0.7320.

There was significant downward pressure on the euro during NZ trading hours as it headed towards the 1.08 mark. EUR would have fallen further, if not for some intervention by the Swiss National Bank, following through after Governing Board member Maechler said in a weekend interview that the SNB was “ready to intervene if necessary”. After falling to a low of 1.0806, the currency is back to 1.0875, the best performing of the majors since the NZ close.  NZD/EUR got close to 0.64 and is now flat for the day at 0.6280.

NZD/GBP spiked to about 0.5250 yesterday, and is back down at 0.52. NZD/JPY almost got to 79.6 and is back down to 78.8.

NZ bonds remain off the radar for offshore investors as they focus their attention on the larger markets. In a quiet market, NZGB yields were marked down 4-5bps in response to offshore forces. NZ swaps were down 3-4bps. Some of the funding pressures seen in overseas markets is also being felt in the short end of the NZ curve, evident in higher bank bill rates and FRAs. Bank bill future rates were up in the order of 4-5bps.

Economic data releases remain a secondary consideration at the moment as investors focus their attention on the situation in Ukraine and its future economic impact. There are only second-tier economic data on the calendar today.