As we enter the end of February and the beginning of March, I could be discussing the very busy week of data ahead and its implications on monetary policy. But who are we kidding? It's all about the Russia-Ukraine situation and evolutions in that situation will drive market sentiment and direction. I will circle back to that.
First of all, though, let’s take a look at the week ahead elsewhere. In the US and Europe, we have an avalanche of manufacturing and non-manufacturing PMIs, a probable Bank of Canada rate hike, two days of testimony on The Hill by Federal Reserve Chairman, Jerome Powell, capped off by Friday's latest US Nonfarm Payrolls release. In Asia, we see regional PMIs released, indicating the direction of travel of Omicron impacted (or not) economies, an RBA rate decision on Tuesday, and most importantly, official and non-official China PMIs.
Looking at that line-up, I would say the most important snippet will be from the Powell testimony and whether the Ukraine situation threatens to derail the pace of tightening from the Fed, which should start at this month's FOMC meeting.
Now that that is out of the way, it's time to circle back to the only thing that really matters to financial markets and the world right now, Russia’s war in Ukraine. First of all, I must doff my hat to the Europeans, whose recalcitrance I have criticized recently. Over the weekend, sanctions were seriously escalated with Europe fully on board. Russian banks were cut off from SWIFT, although I can’t find a list of which Russian banks. Notably, the EU, Britain and the US are freezing the Russian Central Banks' assets, meaning they can’t be deployed to intervene in currency markets. The list of airspace bans and asset freezes and travel bans on Russian individuals and companies is too long to list. Most notably, Germany, which had been dragging its feet, got on board and also authorized weapon sales to Ukraine and also massively hiked its defense budget. No more German soldiers turning up to NATO exercises with broomsticks.
President Putin will now have to accept that the “Western” powers are prepared to accept quite a bit of economic pain now to punish Russia. Naturally, he put Russian nuclear forces on high alert and Belarus “voted” to allow Russian nuclear weapons to be stationed on its soil. Meanwhile, it appears that the Russian invasion is not quite going to plan thanks to the tenacity and bravery of the Ukrainian people.
A bank run has already started in Russia over the weekend, and the Russian ruble, if it actually trades today, will be well above $100 to the US dollar. Inflation will immediately spike massively, and the Russian banking system is likely to be in trouble. None of that will bother Mr Putin, but his soldiers have effectively had a near 50% pay cut since the war has begun in dollar terms. If Mr Putin authorizes the use of thermobaric weapons, even China is likely to drop him like a hot rock, and the endgame will have begun.
Asia has seen a sell-off in risk today and a rush to havens, not just because of the Putin nuclear headlines, or the imminent implosion of the Russian economy, but also because of the rippling effects across the global economy, starting with inflation. US stock futures have tanked, oil and gold have rallied, and the US dollar if pushing higher versus DM and Asian EM currencies. All straight out of the risk aversion playbook.
Asia stock markets, however, are proving very resilient, and in the case of China, Japan, and Australia, are actually rallying, which US futures have unwound some of their losses. Firstly, my initial impression of the SWIFT exclusion is that it is designed to still allow payments for energy and commodities. Also, Russian and Ukrainian officials will stage a meeting today on the Belarus border. Clearly, the perpetual buy-the-dip mega-bulls of the equity market are pricing in that some progress will occur on ending the war. I won’t disagree with the premise, only the timing.
The first sign of progress officially emerging from that meeting, should it occur, should spark an immediate rally by global hot money into risk. The longer-term consequences of cremating the Russian economy will be a global headwind, but in the shorter term, an even remotely positive meeting should swing market sentiment.
Asian equities are impressively resilient
US futures were crushed at the Asian open this morning, unwinding all of Friday's impressive gains. Since then, US index futures have pared some of those initial losses, while several key Asian markets are actually trading in positive territory.
Futures on the S&P 500 are 1.20% lower, while the NASDAQ has tumbled by 1.85%. The Dow Jones Industrial Average has suffered the most, its components having the greatest exposure to skyrocketing energy and commodity prices. Dow futures had retreated 2.05% lower in Asia.
Asian markets are telling a rather different story, based I believe, on SWIFT restrictions not blocking financial flows for energy and commodity exports from Russia, and hopes that the Ukraine-Russia meeting today yields some progress on ending the war. Additionally, China’s PBOC has injected a massive CNY 300 bio of liquidity into local markets today via the 7-day repo, to steady nerves.
That has all left Asian markets trading in a very choppy manner each side of unchanged. The Nikkei 225 is 0.30% higher, with South Korea’s KOSPI rising 0.40%. In Mainland China, the Shanghai Composite has fallen 0.40% after rising earlier, while the CSI 300 has also fallen by 0.75%, after rising earlier. Hong Kong is down 0.80%.
Singapore is down 0.70%, with Kuala Lumpur jumping 1.10%, likely on the commodity and energy rally. Markets in Taiwan and Indonesia are closed today. Like Kuala Lumpur, Australian markets are also higher. The ASX 200 and All Ordinaries climbing by 0.50%.
Although Asian markets are chasing their tails somewhat today, with very choppy price action seen, it is notable that we are not seeing a stock meltdown after the weekend’s developments. Europe is unlikely to fare as well given that the actions by the EU and Germany suggest they are prepared to accept more economic pain to bring Russia to heel. European stocks are likely to open sharply lower and reverse Friday’s gains unless we get a positive surprise from the Ukraine-Russia meeting today.
US dollar remains elevated
The US dollar has risen sharply in Asian trading as the weekend sanction escalation sparked haven flows into the greenback. The Dollar Index is 0.70% higher this morning. EUR/USD has fallen by 0.90% today to 1.1170, and although technicals are slightly meaningless in these sorts of markets, we would need to see 1.1100 fail to signal a greater sell-off.
The Japanese yen has also seen haven inflows, with USD/JPY unchanged at 115.50 today, capping US dollar gains. However, GBP/USD has fallen by 0.40% to 1.3360, and sentiment indicators, AUD/USD and NZD/USD have suffered. AUD/USD has fallen 0.70% to 0/7180, while NZD/USD has tumbled by 0.85% to 0.6685.
USD/CNY and USD/CNH remain unchanged at 3.3150, with the PBOC intent of limiting volatility and some haven flows into the yuan’s capping US dollar gains. Reginal Asian currencies are on the back foot, driven by nerves of energy prices and supplies, and a move to safety by fast money flows. USD/KRW, USD/THB and USD/INR are all around 0.75% higher today and the energy importing nature of Asia means they will remain vulnerable to higher oil and gas prices. Ukraine is also a major exporter of grain to the region, and fears of food price inflation will also persist.
The Russian ruble, thanks to the weekend SWIFT restrictions, is understandably thin in trading today. Most non-Russian banks will be reluctant to settle the other side of any ruble trade, and I have no doubt compliance officers are having a busy morning. The ruble was trading domestically near 150 over the weekend as Russians caused a bank run in the rush to change savings into hard currencies. It has allegedly traded at 117.00 on wholesale markets today, and I believe that the Europeans coming on board with SWIFT and freezing the Russian central bank reserves means worse losses are to come for the currency. That appears to be spilling over into other adjacent markets with USD/TRY rising by 1.80% in Asia.
Oil prices are sharply higher on enhanced sanctions
Unsurprisingly, the sharp escalations in sanctions over the weekend, which sparked panic among ordinary Russians, has seen oil open sharply higher today. Brent crude has soared 3.50% to $101.85 a barrel, and WTI has rocketed 4.55% higher to $96.10 a barrel.
Oil prices are, in fact, slightly off initial highs, potentially on hopes from the Ukraine-Russia meeting, with similar price action seen in equity and currency markets. Volatility is set to continue, with short-term direction at the mercy of headlines from Eastern Europe. A global SPR release is likely to be only a temporary band-aid on what was a tight energy market anyway pre-conflict.
Brent crude has well-defined support at $96.00 a barrel, with resistance at $106.00. WTI has support at $90.00 a barrel, with resistance at $100.00 a barrel. Bring deep pockets and nerves of steel if you want to play in this market.
Gold spikes higher
Western sanctions on Russia were substantially enhanced over the weekend, leading to a risk-aversion sell-off in markets at the Asian open, and a resulting haven spike higher by gold prices. Gold has risen by 1.10% to $1911.00 an ounce this morning but is now somewhat lower than its intraday highs around $1927.00 an ounce.
Gold’s price action is very much following the calming nerves price action seen in other asset classes today, helped along by hopes from the Ukraine-Russia meeting on the Belarus border to come. Gold’s price action disappointed last week, tracing out an outside reversal day, a bearish indicator after it hit $1975.00 an ounce on panic buying.
That will add an element of caution to gold buyers now and if anything, gold is more acutely vulnerable to any sort of positive news, no matter how tenuous, coming from Eastern Europe. Gold has resistance at $1927.00, and $1975.00, with support at $1880.00. Failure of the latter could spark a sharp reversal lower potentially extending to the $1800.00 an ounce area.