It feels like we could get 'war' headlines at any moment; still the pullback in USD/RUB, oil prices, and gold suggest that investors are satisfied that Russia's 'peacekeeping' incursion into eastern Ukraine will not escalate into a broader incursion into Ukraine.
This assessment rests on the idea that NATO countries are discouraging further escalation by holding off on the severest sanctions possible. Announcements of further steps regarding Russia's banking sector and measures controlling technology exports would further support de-escalation.
However, the risk to this view is that with the severest sanctions avoided, for now, there is plenty of scope for on-the-ground escalation before NATO countries' firmest stance on sanctions materializes. Put another way, the West's immediate reaction is less severe than Russia might have anticipated. That, in turn, would make the correction in commodities look premature.
Energy supply and prices are the links between Ukraine/Russia tensions and global macro. Europe's dependence on gas supplies and persistently high European and US CPI inflation reflects both the reaction of these countries/regions to Russia's move into eastern Ukraine and its importance to global monetary policy.
Indeed, the reaction in rates markets has been for a rapid back-up in yields, encompassing bear flattening in USTs (2s10s: 38bp) and the repricing of more than 6 x 25bp rate hikes for the Fed this year.
Despite that, the USD and US equities are not rallying meaningfully. Geopolitical-driven lower yields did not help equity markets and now that bond markets are selling off, US Growth equities remain under pressure, pointing to more persistent US equity market underperformance that hurts the USD.
Forex: focus is on "the bird"
Despite meeting market expectations for a 25bp rate hike, the RBNZ was more hawkish on both a qualitative and quantitative basis in the statement and its forecasts, driving NZD upside, with the title of the policy statement encapsulating its contents: "More tightening is needed."
A key reason why USD has struggled for upside traction despite geopolitical risks is that the Fed's peers are embarking, or are in hiking cycles, already.
The statement leans hawkishly, citing rising inflationary pressures (doesn't see inflation returning to 1-3% band until Q2 2023), with higher oil and transport costs risking "generating more generalised price rises, especially given the current domestic capacity constraints."
These risks are mitigated by the view that global growth is slowing and the current Omicron outbreak could dent consumer sentiment.
The upshot of the statement that is hawkish on balance is that the Committee sees the cash rate peaking at a higher level than it did in November. The OCR central projection has risen to 2.22% for Q4-22 (from 2.14% in the Nov MPS), 3.26% for Q4-23 (from 2.56%), and 3.35% for Q4-24 (from 2.61%).
Consistent with these forecasts,
"The Committee agreed that further removal of monetary policy stimulus is expected over time given the medium-term outlook for growth and employment, and the upside risks to inflation."
Gold: buying on dips
The path of least resistance for gold today points towards buying on dips. Price action is fatigued in gold crosses—XAU/EUR, in particular, looks overdone—and a healthy positioning flush-out is required before re-engaging.
Gold traders have well-documented the well-placed COMEX length through 1843. COTR reported 3.5 mn oz of fresh longs that engaged for the week to Feb 15. Into the balance of last week, between Wednesday and Friday, COMEX aggregate OI surged by 4.5 mn oz. But the VWAP over that period is 1893, which stands as vulnerable today if risk picks up.
Discretionary flow has largely been absent in OTC markets, as has been the case in recent weeks. But local Thai jewellery is thinking 1850 for physical demand to return. India is quiet while China is less active and flush with inventories (importers are awaiting fresh quota awards in early March). There has been good demand for Zurich gold though (a proxy for physical).
I suspect long-term holders are willing to allocate but are looking to buy on dips.
Oil
The markets have simplified the complexity of a Russia/Ukraine/NATO conflict into a trade on energy and hence inflation. It's true that both will be highly influenced by the situation, but elsewhere, other markets appear either complacent or at the very least unprepared.
Equity does not seem to be carrying the protection it ought to, real yields have hardly moved, there seems little concern about the damage that could be done to economic growth and the market still thinks the ECB will be raising rates this year despite the potential for armed conflict on its border. Iran nuclear talks represent a potential downside risk for oil, but despite what a spokesman for Iran's Foreign Ministry calls "considerable progress," the market seems to be pricing in continued uncertainty.
Iran says the remaining "two or three" issues are the most difficult to resolve, and the market is unlikely to price in the return of Iranian barrels until there is a meaningful step forward. If this does happen, the prospect of a rebound in Iranian production and the sale of oil in floating and onshore storage could trigger a $5-10 or even $15/b correction as the froth gets skimmed in my view.