- US and allies discuss ban on imports of Russian oil due to war
- Crude oil almost hit $140 before easing lower
- Gold at $2K as haven demand spurs Treasuries
The new week has started with a bang, with stocks tumbling and crude oil soaring at the Asian open overnight as traders woke up to weekend news that the US and its allies are discussing a coordinated embargo on Russian crude supplies, while trying to prevent a global supply shock. The news saw Brent oil soar 17% and lifted it near the $140 handle, some 20 bucks higher than the previous week’s high, before prices quickly erasing some of those massive gains. US stock index futures have slumped between 1 to 1.5 percent, while markets with greater exposure to Russia, for example German stock markets, have fared even worse. The DAX was down 3.5% shortly after the open. Airlines have slumped on the back of the spike in oil prices. European gas, palladium and copper are among the markets to hit new all-time highs today. Safe haven gold and government bonds gained further ground, as yields slipped further.
Source: ThinkMarkets and TradingView.com
The latest falls come on the back of continued conflict in Ukraine and a growing list of Western sanctions on Russia. These events have roiled the markets in recent weeks, sending commodity prices surging higher on fears over supply shortages. Extremely high energy prices, and well as other commodities like wheat and corn threaten to stall global growth, which is why we are seeing so much weakness in risk appetite. European stocks have sunk due mainly to their huge exposures to Russia, and fears the situation is going to tip the Eurozone into a period of stagflation. The DAX for example has now erased its entire 2021 gains in the space of just 58 days, slumping back below the pre-pandemic high of around 13830.
Ukraine situation remains keys event
So, as we have already seen, it is once again all about Ukraine and sanctions from the West on Russia that is going to dominate the agenda once again this week. The ECB meeting and US CPI data aside, nothing else is going to matter this week, you would feel. The focus will be fixated on the Ukrainian situation and unless something changes dramatically, I am expecting risk aversion to remain the dominant theme. Any rebound we might see in the stock markets should be taken with a pinch of salt, while there is no resolution in the conflict.
ECB policy decision (Thursday)
With regards to the ECB’s decision, will the market certainly don’t expect to hear any hawkish surprises from Christine Lagarde and her colleagues. They are facing a major dilemma, like all other major central banks. With the euro having slipped below $1.10, the market is convinced there will not be any rate hikes this year at all.
So, after the ECB's hawkish pivot at the February meeting, are we going to see yet another twist? It all depends on how the ECB will see the situation in Ukraine and Russia impacting growth and inflation. Had it not been for the intense geopolitical situation, the ECB would have probably talked up the first rate hike in H2 because of the recent improvement in data and surging inflationary pressures. At this meeting, the ECB is likely to go ahead with ending PEPP but warn that the outlook could change depending on what happens with in the Ukraine situation. It is possible that if tensions de-escalate quickly, the ECB will probably turn hawkish quickly. A gradual and flexible approach to monetary policy normalisation is the message we will likely hear from the ECB President Lagarde.
US Feb CPI (Thursday)
Consumer prices are expected to have risen further, to +7.8% in annualised basis from +7.5% previously.
But will it matter how hot CPI is going to be? Fed Chair Jay Powell has already come out and said he will recommend a 25 basis point hike at their meeting later this month. Inflationary pressures are surging. This week, we have seen commodities such as crude oil, wheat and corn rise massively, along with aluminium and a few other base metals. This is all to do with Russia’s invasion of Ukraine, fuelling fears of supply crunches.
The US is relatively less impacted economically by the situation between Ukraine and Russia, compared to, for example, Germany. This means, the Fed is going to go ahead with its rate hike.