Equity markets in New York recovered some of their losses yesterday, and today, markets in Asia are cautiously higher after the US and Europe imposed new sanctions on Russia after it formally recognized two breakaway provinces of the Ukraine and started moving peacekeeping military equipment into them. Markets though, breathed a sigh of relief that the sanctions were not more sweeping and aggressive, allowing oil, the US dollar and gold to ease slightly, while risk sentiment currencies rallied, and equities staged some sort of dead cat bounce.
Perhaps the most significant move was from Germany, the most fence-sitting member of the “Western” alliance if one wishes to describe it as such. Germany halted the Nord Stream 2 pipeline project, although now that it is fully built, it does have a free option in the future. Nothing can disguise that Europe’s strategic NIMBY-ism ineptitude in tying their energy reliance to Russia leaves the bloc woefully exposed to further escalations. The unfortunate fact of the transition to renewable energy is that energy storage technology lags behind renewable generating technology badly. Shutting down nuclear and outsourcing your energy needs to unreliable partners out East, be it plastic recycling, energy, or rare earth elements, keeps the tree-huggers happy over their kombucha teas, but leaves you strategically exposed when the flag goes up. As long as this crisis lasts, I will struggle to be structurally bullish on the euro or Europe.
It appears that the US, Europe and others are adopting an incremental sanction strategy intended to leave President Putin a diplomatic off-ramp along the way. Markets will likely bubble along sideways now until we see Mr Putin’s next move. But I have no doubt that Russia/Ukraine still have the potential to deliver a stagflationary shock to the rest of the world if it escalates and oil prices spike to above $130.00 a barrel. That would leave many central banks having to push the W for Wimp button and halt monetary normalization just as inflationary pressures intensified sharply.
Moving out of the world of geriatric autocrat power plays, life still goes on. Germany’s IFO data ignored Ukraine nerves and impressively outperformed, as did the US Markit Manufacturing and Services PMIs. The US House Price Index rose modestly by 1.20% although the Richmond Fed Manufacturing Index fell while Services jumped. In totality, you would have to say that both Europe and the US are moving past Omicron disruptions and that the recovery remains on track, as would monetary normalization, from the Federal Reserve anyway.
In Asia, Japanese markets are closed for the Emperor’s birthday. Elsewhere, Australian wage growth climbed by 2.30%, below the RBA’s 3.0% target. That likely allows them to remain on hold for at least one more meeting. The RBNZ though did hike this morning, adding 0.25% to being the reference rate to 1.0%. The RBNZ said the economy was growing at unsustainable rates and that unemployment was unsustainably low. Their interest rate projections into next year suggest that every meeting going forward this year will feature a 0.25% hike. Before we load up on New Zealand dollars though, the RBNZ has managed to engineer an economy with Norway prices, above full employment, but without Norway wages. That takes a special talent, and I am unsure if the RBNZ can engineer a soft landing for New Zealand’s economy, and I’m being polite.
Thailand releases its Balance of Trade this morning, and that may provide some good news for the local currency, the baht, which has been thoroughly EM/Ukraine’d this week. The reopening of borders should see tourism accelerate propping up the trade balance. Singapore’s core inflation YoY for January is expected to rise slightly to 2.50%, impressive by world standards right now. A higher print will increase the noise around the MAS tightening policy once again, although as the ultimate trading nation, they will look at Eastern Europe with more taut nerves than most.
Meanwhile, China markets remain under pressure as rumors of a new tech crackdown just won’t go away. Property sector rollovers will gather pace in the second half of the week bringing a serious problem pushed off the front page, back to it potentially. Future tax cut announcements have failed to lift animal spirits in Mainland China. Hong Kong’s budget today, as the entire population prepares to get swabbed, is likely to see an equally anemic reaction.
Eurozone inflation data is released later today with the headline expected to remain above 5.0%. Expect more transitory rhetoric.
The US has a quiet calendar although a Fed speaker or two, or noise from the White House could spark some intra-day volatility. Interestingly, although equities clutched at sanction straws and currencies remained steady, metal and agricultural prices surged higher and stayed there. That’s as good a sign as any that the Ukraine situation remains the primary driver of market direction and volatility despite my best efforts to distract you over the last few paragraphs. Ironically, it is a Russian holiday today. Defense of the Fatherland Day…
Asian equities stage a sanctions dead-cat bounce
A sense of “it could have been worse” swept New York late in the session on Tuesday after the White House announced its incremental Russian sanctions. That allowed US equities to reverse some of their losses, helped by decent economic data, but they still finished in the red. The S&P closed 1.02% lower, the NASDAQ lost 1.23%, and the Dow Jones closed 1.42% in the red. The buy-the-dippers are out in Asia as well as the Ukraine news ticker goes quiet for now. Futures on the S&P are up 0.40%, the NASDAQ 0.55%, and the Dow Jones by 0.55%.
The same sentiments are also lifting Asian markets cautiously higher today after a torrid week so far. Japan is closed, but the South Korean KOSPI is up by 0.20%. In China, the Shanghai Composite and CSI 300 have risen by 0.55% while Hong Kong is 0.65% in the green.
Weak results from OCBC have pushed Singapore 0.75% lower but elsewhere in ASEAN, markets are higher. Taipei has risen by 0.25%, Jakarta by 0.40%, Kuala Lumpur by 0.75%, Bangkok is flat, and Manila has eased 0.70% lower. Down in the lucky country, Australian indexes are in the green, helped along by the commodity rally overnight. The ASX 200 is 0.35% higher, while the All Ordinaries has rallied by 0.50%.
European markets will struggle to match Asia’s rally although if the Ukraine news ticker goes quiet for a couple of days, I fully expect equities globally to continue rallying on a no news is good news play. Don’t be fooled though, the moment the Ukraine situation darkens, so will equity markets.
US dollar holds steady
Currency markets had plenty of intraday volatility yesterday, bounced around on Ukraine headlines and Russian sanctions. Ultimately, the softer than expected sanctions won the day and the US dollar gave back all its early session gains, with the euro and Australian and New Zealand dollars outperforming as arbiters of global risk sentiment. The Dollar Index finished 0.07% lower at 96.07, where it remains in Asia. A Japanese holiday will mute trading volumes in Asia today.
EUR/USD reclaimed 1.1300 as it rose to 1.1325, but the single currency faces formidable technical resistance at 1.1400 and is highly vulnerable to negative Ukraine headlines. GBP/USD rose to 1.3595 with support/resistance at 1.3550 and 1.3650. USD/JPY is at 115.00 and remains in a broad 113.50 to 116.50 medium-term range.
AUD/USD is holding onto its overnight gains at 0.7225 today with resistance at 0.7250. A 0.25% rate hike and seemingly hawkish RBNZ statement have lifted NZD/USD 0.40% higher to 0.6760. It is likely to perform better versus the Australian dollar and Japanese yen than the greenback, which will inevitably rise if Eastern Europe gets worse.
Asian currencies spent yesterday under pressure unsurprisingly, with the baht, Korean won and Indonesian rupiah among the worst performers. USD/CNY looks set to retest 6.3200 with the yuan becoming something of a fashionable haven currency right now apparently. For the rest of Asia though, regional currencies have failed to recoup any of yesterday's losses and in the rupiah and ringgit’s cases, have continued weakening. That is yet another warning that global investor sentiment remains very cautious and that any relief rallies are likely to be short-lived.
Oil prices remain elevated
Oil prices spiked higher on Ukraine developments yesterday, with Brent crude peaking for a short time, above $99.00 a barrel. Following the US and Europe sanctions announcement, oil rapidly gave back its intraday gains, finishing slightly lower than yesterday morning’s opening. Brent crude closed 0.60% lower at $96.30 a barrel, and WTI closed at $91.60 a barrel.
In Asia, local buyers have emerged to buy the dip, another warning sign that physical traders feel that the lull may be temporary. Brent crude and WTI are 0.70% higher to $97.10 and $92.20 a barrel respectively. Lost from the front pages, an Iran nuclear deal could potentially emerge this week, which would add around 1.5 million bpd to international markets. That is probably tempering gains in oil for now even as OPEC+ members reiterate that they are pumping enough oil for global needs. An Iran deal failure, or a Ukraine escalation, will send prices back to recent highs.
Brent crude has resistance at $99.50 and 100.00 a barrel, with support at $95.50 and $90.00 a barrel. WTI has resistance at $95.00 a barrel and support at $90.00 a barrel. A full-scale invasion of the Ukraine will render those resistance levels a moot point and I believe Brent crude will spike to the $120 to $130 area.
Gold holds steady but watch for potential Silver topside
Gold prices spiked to $1914.00 an ounce earlier in yesterday’s session on Ukrainian nerves. However, the US and Europe sanctions announcement sparked a relief rally in risk sentiment, pushing gold to a daily close 0.30% lower at $1898.50 an ounce.
Gold has support at $1880.00 an ounce, with resistance at $1920.00, $1960.00, and then $2000.00 an ounce. The relative strength indicator (RSI) remains very overbought, tempering gold gains for now. However, the topside remains the path of least resistance and gold prices will quickly resolve above $2000.00 if Russia’s actions in the Ukraine intensify and more Western sanctions follow.
Silver
Silver has been lost in the Ukraine noise but is now displaying some very construction longer-term price action. Silver appears to be in the process of breaking out of a symmetrical triangle formation dating back to May 2021. The base of the triangle is at $21.4000 an ounce, with the slope today at $24.2100.
Silver is trading at $24.2000 today and has been flirting with the resistance for the last couple of sessions. I would personally like to see silver close nearer 24.5000 by Friday to confirm, but a breakup signals a potentially quite quick rally targeting $31.5000 an ounce. Worth keeping an eye on.