Volatility continues to be the winner yesterday, particularly in the commodity space as the street engaged in its latest grasping at straws attempt to price in “peak-Ukraine.” European equity markets got the ball rolling, hoovering up equities on Ukraine-Russia reproachment hopes ahead of a meeting between the two sides in Turkey today. Ukraine’s President also said yesterday morning that he was open to neutrality and not joining NATO.
My issue is that that information was already out there, and markets ignored Mr. Zelensky’s comments that he would not cede and territory to Russia as part of any negotiations. On the other hand, President Putin mentioned slurping up Crimea and part of Eastern Ukraine into Russia permanently. I guess we have our negotiating starting points. I have trouble believing anything President Putin says, but the market is desperate to price in peak-Ukraine, and I will respect the momentum.
New York was never going to pass up the chance to price in peak-Ukraine either as 14 years of Federal Reserve quantitative easing in one shape or another has embedded buy-the-dip into the DNA of investors. It was given further impetus by comments by the UAE Energy Minister that his country favored higher production from OEPC+.
Iraq also chipped in and said it was ready to pump more if necessary. Oil plummeted and Brent crude yesterday traded in a near 19.0% range by my calculations. Breath-taking volatility and whipsaw conditions I have rarely seen. Similar scenes played out in the rest of the commodity space and precious metals.
I have an issue with just about all the premises for the whipsaw, peak-Ukraine, rally. Today’s meeting in Turkey, and the Ukrainian and Russian Presidential comments were already out there. No result from today’s meeting could send markets back to square one. Additionally, the UAE Energy Minister has since qualified his comments by saying it is committed to the OPEC+ production pack and the grouping itself.
He can ask for more oil to be pumped; he may not get his wish. One breath-taking statistic I saw from a newsletter I subscribe to, The Daily Shot, was that Russia was paid EUR 660 million for ONE DAY’s natural gas by the EU on Mar. 3 thanks to the surge in prices.
I fully understand that the EU has no choice, but don’t be too sure that the + in OPEC+ will sign up for higher production. Additionally, Reuters is reporting that China urges state refiners to halt fuel exports in April to maintain domestic stocks. They don’t think the energy crisis is going away. Did I also mention a stalled Iran nuclear deal?
So, although the argument for lower oil is full of holes, perhaps one headline today is giving me the most cation. The US has said that Russia may be engaging in another false-flag operation as an excuse to deploy chemical or biological weapons in Ukraine. Whether you are a US fan or not, they, almost alone, have called the evolution of the Ukraine war almost precisely correct, even as the idea was dismissed elsewhere.
I’m not sure where that leaves the world if the Kremlin takes this route, least of all for the hapless citizens of Ukraine. But it won’t be good for equities, and energy and commodity prices won’t be coming down. Tread carefully trying to pick the bottom in risk right now, its foundations are tenuous, and as I have repeatedly said before, we are one headline away from the whole mess unraveling again.
Elsewhere, South Korea elected a new president yesterday by the narrowest margins. Yoon Suk-Yeol is right-of-center and has ridden a wave of dissatisfaction over the cost of living and house prices to claim victory. That is probably a warning sign to other incumbents worldwide facing elections this year.
On the periphery, President Yoon should be more pro-business than his predecessor, which should be a modest positive for South Korean equities. However, the opposition still holds the house as the elections are not synchronous, so that any aggressive legislative agenda may run into immediate headwinds. Nor will the Bank of Korea be swayed from a tightening path. Net-net, the election isn’t likely to radically shake the status quo as the narrowness of the victory isn’t screaming an overwhelming electoral mandate for change.
New Zealand’s Electronic Retail Spending data was very soft indeed for February, rising just 1.10% (10.40% exp). The omicron wave gripping the country is an easy explanation. But it will be interesting to see if the post-omicron landscape causes a change. The ham-fisted policies of the RBNZ have left the country with Norwegian prices and Nigerian wages, and it remains at the top of my list for a hard landing in 2022. The impact on the currency will be limited, however, as the Kiwi is buffeted by Ukraine risk-flows and rate hike expectations.
today’s main event will be the European Central Bank policy decision. Quite rightly, I expect them to call a halt to any thoughts of more QE tapering and to pull back on rate hike expectations severely. Europe is more impacted by the Ukraine situation than most, and a wait-and-see stance is entirely justified. That may give some headwinds to the euro, but realistically, the single currency remains at the mercy of the ebbs and flows of the war in Ukraine.
today’s US inflation report has definite upside risks. The NFIB survey suggests that maybe America’s labor crunch is starting to ease, while inflation fears are rising amongst businesses. But there is a definite risk that YoY inflation rises above 8.0%, which will lock-and-load the FOMC to hike next week and possibly strengthen hawkish rhetoric, Ukraine or not. Given that monetary policy divergence across the world is a real possibility now in 2022, it is hard to construct a reason to be bearish US dollars right now.
Asian Equities Are Flying
With oil prices crashing yesterday and tenuous hopes that a Ukraine resolution was on the table, equity markets saw a biblical stampede of bottom-fishers pouring into equity markets, sending them soaring. The S&P 500 leapt 2.57% higher, while the NASDAQ Composite rocketed 3.59% higher, helped by an Amazon (NASDAQ:AMZN) stock-split announcement. The Dow Jones, meanwhile, rallied a still-impressive 2.0%. In Asia, US futures are pausing for breath, perhaps on the latest UAE statements. Futures on all three indexes have eased by around 0.15%.
Asian markets are rapidly playing catch-up and rallying powerfully today, with retail-trader heavy bourses doing particularly well and displaying their usual herd-like behavior. The Nikkei 225 has soared 4.0% higher, while South Korea’s Kospi has risen by 2.10%. The fuel export ban story mentioned earlier has been ignored in China as exchanges enjoy a day in the sun. The Shanghai Composite has risen by 1.90%, with the CSI 300 jumping 2.30% higher. Hong Kong has risen by 1.60%.
With oil prices creeping higher in Asia again, the euphoria has been slightly tempered in regional markets, but they are also rallying. Singapore is 1.35% higher, Taipei has jumped by 2.45%, with Kuala Lumpur just 1.10% higher and Jakarta unchanged for the day, possibly after raising the limit palm oil producers must sell to the domestic market. Bangkok has risen by 0.70%, with Manila up 1.15%. The fall in resource prices yesterday is also tempering gains in Australia, where the ALL ordinaries and ASX 200 are 1.10% higher.
With US futures trading sideways in Asia, European markets are unlikely to display the same bullish momentum this afternoon unless we get a breakthrough in the Ukraine-Russia talks in Turkey. I believe a dovish ECB is already priced into markets, and if anything, if they are less dovish than expected, it could be a headwind.
Given the volatility seen this week, picking the direction of US markets has become a turkey shoot. Markets will swing on Ukraine and oil developments, and I hold that we are just one big negative headline from consigning yesterday’s recovery to history.
US Dollar Eases
In keeping with the price action in other asset classes, the US Dollar staged a sharp retreat yesterday on Ukrainian and energy hopes. The dollar index tumbled by 1.10% to 98.00 before creeping up with oil prices this morning to 98.13. The tumble yesterday has resolved the greenback's overbought technical situation. If the Ukraine hopes turn out to be a false dawn as expected, the US Dollar should recover much of its losses. Only a fall through 97.50 suggests the correction will continue.
Improved risk sentiment lifted EUR/USD sharply higher, leaping 1.67% to 1.1077 before easing to 1.1056 in Asia. The multi-year support line at 1.0800 held nicely this week, and it could be that we have seen the worst of the Ukrainian-related selling. Multi-month resistance lies at 1.1400, and a long-term low will only be confirmed if it breaks.
Interim resistance lies at 1.1200. Notably, GBP/USD rallied only 0.65% to 1.3180 yesterday, capped by EUR/GBP buying. Key support remains at 1.3075, with resistance at 1.3300. USD/JPY has firmed to 116.10 as US yields rose once again yesterday. A break of 116.50 will signal a new rally is underway.
The AUD and NZD rode the wave higher in sentiment yesterday, but gains were tempered by the fall in commodity prices. Both currencies will continue to be buffeted by sentiment and moves by commodity prices on the other. That suggests more choppy but sideways, price action ahead. Having booked substantial gains over the past weeks as commodities rallied, the antipodeans remain more vulnerable to risk-aversion flows now.
Asian currencies rallied strongly yesterday, led by the Korean won and Indian rupee, which are more sensitive to risk sentiment flows than most of their peers. The collapse of oil prices was the main driver, but with oil prices creeping higher again in Asia, some of those gains are starting to be reversed. The yesterday price action is likely to be the eye of the storm and not a structural change for Asian currencies, which still face a massive inflationary shock from the energy and commodity space.
Oil prices Collapse On UAE/OPEC Comments
Oil’s volatility reached new levels of insanity yesterday, with Brent crude trading in a $25 intra-day range. Oil prices were moving lower on Ukraine's compromise hopes already from earlier in the day when the UAE comments about asking OPEC+ to raise production to send oil prices into a tailspin. Brent crude finished 13.20% at $112.00 a barrel, with WTI collapsing 12.15% to $109.60.
The UAE has since reeled back on its initial OPEC+ comments, the Iran nuclear deal is stalled, and Reuters is reporting that China’s state refiners are being urged to halt April fuel exports. That has seen nervousness return to Asian markets, pushing Brent crude 2.25% higher to $114.60 and WTI 0.85% higher to $110.55 a barrel.
I can only imagine that liquidity is shot to bits in the oil futures markets now, and picking technical levels is a bit meaningless. The yesterday lows at $106.00 and $104.00 a barrel should provide initial support. If a perceived breakthrough in the Ukraine-Russia meeting happens this afternoon, both contracts will be back below $100.00 a barrel.
However, the risks are skewed towards disappointment and evolving headlines negative headlines from the Ukraine situation and/or Iran and/or OPEC+. In which case, Brent crude will be back above $120.00 in the blink of an eye.
Gold Dumped From Love Island
If gold was a reality show contestant, it was unceremoniously dumped from the love island yesterday, as the UAE-engineered slump in oil prices sparked a massive bottom-fishing rally in equities, lifting risk sentiment.
That sparked a massive sell-off from haven buyers in gold, which slumped 2.80% to $1992.50 an ounce. Gold has continued slower in Asia, easing another 0.75% to $1978.00 an ounce, and it seems that there are plenty of stranded longs out there still from the last couple of days. The more gold falls right now, the greater the negative feedback loop from nervous longs.
It did say yesterday the rally by gold to new all-time highs would not be a straight line, but I can honestly say I wasn’t expecting this level of whipsawing. One silver lining is that the extremely overbought technical picture has now been unwound, leaving room for gold to gain once again once the culling of this week’s long positions has been concluded.
Everything will depend on the outcome of the talks in Turkey this afternoon and signals from OPEC+ over increased production. Gold could be at $1920.00 tomorrow or back above $2020.00. I know which side my money is on.
Similarly, silver has also resolved its overbought technical picture as it plummeted by 2.35% yesterday, taking out $26.0000 on its way to $ $25.7870 an ounce. Silver has eased further to $25.5900 today, and I won’t rule out further losses to $25.0000 until the dust settles. That would still leave the longer-term bullish breakout intact.