Summary: After a significant plunge yesterday on the news of the Russian invasion of Ukraine, risk sentiment stabilized and even came roaring back after the announcement of sanctions from the US and other countries, which avoided the most severe options and will keep Russian energy exports flowing. Some of the reversal has eased overnight in very volatile markets, with Brent crude trading back above 100 dollars and gold springing back after a wild session yesterday.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - after the announcement of US sanctions that avoided the most severe options that would likely have immediately further spiked energy prices, equity markets breathed a sigh of relief and pulled sharply higher from the earlier steep plunge triggered by Russia’s invasion of Ukraine. The lows of yesterday now serve as an important pivot support, with focus on whether energy prices will ease lower and whether the Fed is set to stay on schedule with a series of rate hikes – especially whether March brings a 50-basis point move.
Hong Kong’s Hang Seng Index (HSI.I) & China’ CSI300 (000300.I). Hang Seng declined modestly while CSI300 rallied 1.3% by earning afternoon. Coal miners were sold off for over 5% both in Hong Kong and A shares, following the NDRC’s announcement to cap price of thermal coal effective from 1 May 2022 at about 30% below current market price. Shares of Chinese electricity generation utilities rallied. Yesterday, Alibaba (09988) reported results in line with expectations overall. Revenues rose 10% YoY and adjusted EBITDA fell 27% YoY. Alibaba rallied 1.4%. NetEase (09999) reported in line revenues +10% YoY and better than expected non-GAAP net profit +71% YoY. CNOOC (00883) got approval for A share listing in Shanghai to raise RMB 35 billion for exploration and development projects.
European equity markets – primed for a strong gap open today after a steep plunge yesterday that saw the DAX challenging the key support levels - the prior major high from early 2020 near 13,800.
EURCHF and JPY crosses – these pairs are sensitive to risk sentiment broadly, together with EURUSD, as the euro is seen as most at risk of economic damage on the potential impact of sanctions and further deleveraging. As with the price action elsewhere, deep sell-offs yesterday were partially reversed, if somewhat less so. EURCHF posted new multi-year lows below 1.0300 briefly before rebounding sharply and EURJPY jumped back above 129.00 after teasing the lower part of the long-established range below 128.00. Long safe haven yields jumped back after a safe-haven-seeking dip yesterday, helping reverse the JPY rally, with USDJPY reversing back above 115.00 after a sell-off through local support. The Japanese yen seems the most sensitive to sentiment across markets.
AUDUSD – this pair reversed back higher after selling off in correlation with other risky assets yesterday, a sell-off that came just after it was teasing a key resistance zone above 0.7250. If markets can calm, the prior Aussie resilience may blossom into something more on Australia’s strong complement of commodities (LNG, iron ore, coking coal, other minerals) and eventual Chinese stimulus on the way, though bulls would appreciate a more hawkish tone from the RBA, which has remained rather cautious in signaling tightening on slow wage growth.
Bitcoin and Ethereum - Cryptocurrencies bounced back overnight with Bitcoin and Ethereum being up by more than 11% and 13%, respectively, over the past 24 hours. This morning Bitcoin is trading just above USD 38.5k and Ethereum just above USD 2.6k.
Dutch TTF gas futures (TTFMJ1) have opened 20% lower after settling yesterday at €134/MWh (8X the long-term avg). The current extreme volatility driven by traders attempt to price in the risk of Russia making further reduction in their supplies to Europe. The weakness today has been caused by a combination of increase flows from Russia and weaker than feared US sanctions. In the event of a prolonged disruption, EU gas inventories cannot be rebuilt before next winter, and as a result the winter 2022/23 TTF gas price settled above €133 yesterday.
Crude oil (OILUSAPR22 & OILUKAPR22) experienced another day of wild price swings, hitting a fresh seven-year high above $105 before slumping more than eight dollars after Biden’s sanctions spared Moscow from energy penalties. The oil market remains tight with the market currently pricing April Brent some $3.6/b above the May contract. Overnight prices bounced back on news buyers, including China, have reduced their buying of Russia’s flagship Urals grade over fears flows could be disrupted. In the U.S. additional barrels were released from Strategic Reserves supporting a weekly build in oil stocks, but overall, the stock report was bullish with a continued drop at Cushing to a September 2018 low raising some concerns.
Gold (XAUUSD) traders experienced a very bruising day on Thursday with gold tumbling close to 100 dollars after surging to a 17-month high. The combination of a heavy overbought market running out of momentum ahead of $2000, fears Russia would need to sell gold to prop up the ruble and President Biden’s sanctions underwhelming the market in terms of impact, helped trigger the turnaround with crude oil and bonds selling off and the stock market rallying. Major risks, however, remain and after finding support at $1880, the November high gold has started to regain some ground. Elevated volatility can be expected given the current situation but high inflation for longer and slowing growth remains our two main reasons for sticking to our belief in higher prices this year.
US Treasuries (IEF, TLT). Uncertainty in the bond market remains extremely elevated. As tensions in Ukraine escalate, the market is evaluating a rise in inflationary pressures and a possible slowdown in growth. The 2-year breakeven rates rose above 4%. Markets pared back rate hike expectations driving yields lower across the curve. The war in Ukraine has taken 25bps rate hike off the table, with markets pricing less than six rate hikes by December. We expect markets to remain volatile as the situation evolves and the yield curve to continue to flatten. Yesterday’s 7-year auction received strong demand stopping through by 1bps with a high yield of 1.905%. Today’s PCE Index is on the spotlight.
European Sovereigns (VGEA, IGLT). As the west imposes sanctions on Russia, the market considers their impact on inflation. However, ECB members sound less hawkish with Holzmann, one of the most hawkish members of the ECB, saying that a Russian invasion might delay the central bank’s stimulus exit. It benefits the periphery, hence the rally in Italian sovereign bonds yesterday. Today Italy sells 2032 and 2027 BTPS.
Junk Bonds (HYG, JNK). It’s time to reconsider credit risk. Junk credits have overperformed investment-grade bonds since the beginning of the year. However, there are signs that credit risk might start to crumble. No junk bond has been priced since February the 10th. Leverage loan indexes are falling on both sides of the Atlantic. Yesterday, BellRing Brands (B2) shelved a deal it was looking to price to finance its spin-off from Post Holding. As pricing junk deals in the primary becomes more difficult, chances of a tantrum increase.
What is going on?
Russian invasion of Ukraine continues with intense fighting around Kyiv and the invasion unfolding from three directions – up from Crimea, down from Belarus and from the eastern Donbas region. Russian forces overtook the Chernobyl nuclear power plant north of Ukraine’s capital city. Ukrainian president Zelenskiy claimed that one of Russia’s aims is to assassinate him to speed the establishment of a new puppet government in the country. A Western military intelligence official warned that Kyiv could quickly fall.
US President Biden announces sanctions on Russia, avoids impacting Russia’s energy exports. The sanctions were against Sberbank, Russia’s largest bank, and four other Russian banks, together representing some 80% of Russian banking assets, according to the US treasury. A significant number of Russia’s elites and their family members were also targeted. The signal that the US and Europe are unwilling to impact flows of energy exports from Russia was clear in that “carveouts” of the sanctions will be established that allow transactions related to payment for energy exports from Russia. Other sanctions focused on limiting Russian imports of high-tech goods like semiconductors that have applications in the military, biotech and aerospace industries. As well, the US avoided one of the more severe financial sanctions options available by not cutting Russia’s access to the Swift payment system.
Central banks react to Russian invasion of Ukraine. A number of ECB members indicated that the Russian invasion of Ukraine could impact policy decisions and the situation has driven the market to unwind the bulk of rate hike expectations for this year from the ECB. The March 10 ECB meeting was flagged by the ECB as one that will bring a re-assessment of the central bank’s inflation stance, but the ECB may have a hard time coming to conclusions if the energy spike worsens, on the risks to the economy. Words from Fed members generally avoided signaling dramatic risks from the situation in Ukraine, with Fed voter Loretta Mester, for example, indicating she is retaining her previous tightening stance, and FOMC voter Christopher Waller indicating a "strong case” for a 50 basis point hike in March and 100 basis points of tightening by mid-year if the economic data supports this course of action.
What are we watching next?
With sanctions on Russia announced, the key market risk could be from energy prices. With the US and other Western powers avoiding the most disruptive options and allowing transaction related to Russian energy exports to proceed, the greatest market risk from the Ukraine-Russia conflict may be on the moves in energy prices, whether due to disruptions of pipelines, or for example due to Russia itself deciding to limit exports to punish the US and Europe for having sanctioned the country. Another angle is that shifts in Russian elites’ wealth abroad that are looking to avoid sanctions could create disruptive effects in the global financial system, according to expert Zoltan Pozsar, an influential analyst.
Earnings Watch. The earnings calendar is winding down for this quarter this week, but the Berkshire Hathaway earnings call on Saturday deserves attention for what the company is seeing in the way of wage and price pressures from the supply chain.
Economic calendar highlights for today (times GMT)
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