The clutching at straws rally we saw in Asian and early European hours yesterday quickly came to an end as Russian President Vladimir Putin quashed any certainty over a US summit regarding Ukraine. He followed that up by recognizing the two Ukrainian separatist regions of Donetsk and Luhansk as sovereign states. Reports are now coming in of an immediate launch of “security operations” by Russia in those areas, which I assume to mean lots of Russian military equipment rolling into the area or the taking off the covers of the stuff that was already in place.
An emergency meeting of the UN security council today will likely be a toothless affair, given that Russia and China are permanent members. Europe and the US have indicated that new sanctions are on the way while being very light with detail. The Russian ruble and Russian stocks tumbled, and the news quickly reversed the incipient rally in European equity markets.
With US markets on holiday, the fallout in currency markets was modest, although the US dollar did rise generally, and US bond futures rose, indicating haven buying. Gold was a natural winner while oil prices exploded higher in holiday-thinned liquidity. Cryptocurrencies' “haven status” appears to have vanished as quickly as the pandemic bull market, but it was equity markets that felt the brunt of the latest Ukraine developments. US index futures have tumbled with their European equivalents and Asia is unlikely to take the news well either.
Asian markets are further complicated by rumors of a new big-tech crackdown swirling around Mainland China this week, forcing denials from Tencent (HK:0700). There is a wall of China property developer debt and rollover decisions due this week as well, both onshore and offshore instruments. Additionally, Fed Governor Michelle Bowman kept her cards close to her chest regarding a potential 50 basis point hike by the FOMC in March, although if the Ukraine situation deteriorates, I fully expect the Fed to hit the big red wimp button and remain unmoved.
We also have rate decisions from the Bank of Korea Thursday and the Reserve Bank of New Zealand tomorrow. The BOK will likely hold fast while the RBNZ will hike by at least 0.25% and signal a slew of hikes ahead. Given their culpability in creating the overheated mess in New Zealand right now, they should really go 0.50%, but I err to mediocrity and not meritocracy with the RBNZ these days. Any reaction to a 0.25% hike by the New Zealand dollar is likely to be limited, as the country is still on the Omicron ascendant phase with serious cracks appearing in the government’s playbook.
Indeed, a full-scale invasion of Ukraine by Russia will leave many central banks with itchy hiking trigger fingers in a quandary. The immediate impact would be an exacerbation of the rampant inflationary pressures globally as oil hits $130.00+ a barrel. But the inevitable slump by equity markets and high-yield bond markets, just as credit is tightening around the world will probably have them, along with the Fed, hitting the pause button on tightening, and even perhaps unwinding forward guidance. Volatility will continue to be the winner, as will the US dollar and gold, and global stagflation could be the fait accompli for some time to come.
We also have Japan Tokyo Core CPI, and Australian Wage Price Index this week, as well as US Durable Goods and Personal Income/Spending, along with the US GDP and Eurozone CPI. It really should be a very interesting week and a positive one as pandemic restrictions are eased or unwound by the day by countries around the world.
Alas, none of this will matter as market direction and volatility will be entirely driven by developments surrounding Eastern Europe. Another day, another, exclusively male, national leader sowing chaos for their own selfish ends. I really do believe the world should bar men from running any country for the next 20 years. If you do what you’ve always done, you get what you’ve always got.
Asian equities slump on Ukraine developments
The incipient rally seen yesterday has been snuffed out overnight after President Putin pushed back on US summit hopes, then recognized the two breakaway areas of the Ukraine and began “security” operations there. That dose of reality in dealing with the Russian President saw European stocks slump and, with US markets closed, US index futures tumbled. Dow futures fell by 1.40%, S&P 500 futures by 1.80%, and NASDAQ 100 futures by 2.50%, or thereabouts.
Despite the US holiday affecting liquidity, I believe the result would have been the same anyway and the selloff continues in Asia today with US index futures around 0.40% lower. Japan’s Nikkei 225 has slumped by 2.0% this morning, with the South Korean KOSPI falling by 1.45%.
China markets are also under pressure, compounded by ongoing tech clampdown rumors and property sector rollover risk this week. The Shanghai Composite is down 1.25% with the more tech-centric CSI 300 tumbling by 1.60% and the Hang Seng slumping 2.30 into the red.
Singapore has eased by 0.75% with Taipei falling by 1.35%, while Kuala Lumpur is down by 0.85%. Jakarta is a relative outperformer, down just 0.20% today, while Bangkok has retreated by 1.55% and Manila by 0.75%. Australia’s ASX 200 and All Ordinaries are 1.25% lower.
With geopolitics subsuming data this week, it is hard to construct a bullish case for equities in the days ahead. European markets are likely to take more fright at the Russia “security operations” in Eastern Ukraine and fall once again today. Meanwhile, the threat of sanctions and an oil price that is screaming $100 a barrel will also keep US equity markets on the back foot.
US dollar rises on Ukraine developments
With US markets closed yesterday for a holiday, volumes and volatility were muted in currency markets, sparing them the worst of the ravages seen elsewhere. Still, the US dollar did receive a modest haven bid, and the old adage of always buying US dollars in a war, is as good today as it was all those decades ago when I started my trading career. Overnight the Dollar Index rose, unwinding all its early Monday losses to close at 96.16, where it remains in Asia. 95.70 and 96.50 are the near-term support/resistance levels.
Asia FX traders are clearly in wait-and-see mode today with volatility muted and the major currencies most around where they opened yesterday morning. EUR/USD is steady at 1.1305, USD/JPY at 114.65, GBP/USD at 1.3585, AUD/USD at 0.7195 and NZD/USD at 0.6705 with AUD and NZD giving back all of yesterday morning’s gains. With the Ukraine situation deteriorating from a market perspective, the risks have skewed towards a higher US dollar, and potentially yen, as investors look for havens. The euro is likely to be the most vulnerable major currency, due to its energy supply chain vulnerability to Russia and pure geography.
Asian currencies retreated overnight as well, perhaps more on rising oil prices than Ukrainian geopolitical nerves, although they are all an intertwined story. The fallout remains relatively modest for now, especially with USD/CNY remaining anchored near 6.3500. A rise through $100 by Brent crude, seemingly inevitable in my opinion, will change that dynamic with most of the region being major energy importers. Malaysia and Indonesia should fare better than most because of that.
Oil prices leap higher on Ukraine developments
If you’ve read the note this far, you know what comes next. Oil prices surged higher overnight on thinned US holiday liquidity after President Putin crushed the summit olive branch and commenced “security operations” in his breakaway satellite provinces of the Ukraine. Brent crude surged 3.60% higher to $97.00 a barrel, with WTI futures rallying 2.10% higher to $93.90 a barrel.
There is some divergent price action in Asia today with Brent crude unchanged at $97.00 a barrel, while WTI has fallen 1.05% to $92.90 a barrel. The White House has just announced that sanctions are coming, and I suspect that US oil supplies, rather more secure thanks to domestic production and benchmarked to WTI, have prompted some basis trading with Brent. Brent crude being the international benchmark should remain rock solid at these levels given developments in Eastern Europe. Also, given it has been a US holiday, I would take today’s WTI price action in Asia with a huge grain of salt.
Short of the US and Europe throwing the Ukraine under the political bus and appeasing Putin in totality, it seems inevitable that Brent crude will test $100 a barrel sooner rather than later. A full-scale Russian invasion likely sees it spike to $130 (at least) dragging WTI with it. It is hard to see Brent moving back below $90.00 a barrel anytime soon now, with OPEC+ capacity limited in its ability to pump more, and Iranian crude frozen out of the market.
Gold rallies on Ukraine developments
Gold prices rose overnight as the Eastern European situation deteriorated and investors went hunting for safe-havens. Gold rose 0.35% to $1904.00 an ounce with volumes muted by the US holiday. In Asia, gold has climbed once again, rising 0.25% to $1909.00 an ounce as the haven theme continued.
Stagflation or a Russian invasion of the Ukraine, gold should be a winner in the coming days and weeks. Initial support should hold at $1880.00, while gold looks set to test resistance at $1920.00 an ounce sooner, rather than later. That opens $1960.00 and then $2000.00 an ounce.
As a stagflation/inflation hedge, or as a hedge against uncertainty, gold appears poised to come into its own and a retest of the previous all-time highs near $2100.00 an ounce can not be ruled out.