- Markets gap: Some gaps filled, others not
- Russia vs. West: What is the biggest global risk?
- What do the sanctions mean for Russia?
- Find out what stocks and sectors are on the move today
- Looking ahead to the week: PMIs, RBA, BOC, Eurozone CPI and US NFP
Source: ThinkMarkets and TradingView.com
The
big gaps observed in the futures at the Asian open overnight clearly indicate the markets hadn’t expected tensions between
Russia and the West to escalate as much as they did during the weekend. It goes to show how volatile the situation is and the
dangers investors face, even if they think they might be completely immune from this situation and other geopolitical risks.
Although big chunks of those gaps have already been filled for some indices, it remains to be seen how much further the markets will be able to recover before we potentially see any renewed weakness. Though
gaps usually get completely filled, that’s not always the case. So, it is best not to jump into any conclusions based on the somewhat bullish price action we have seen since the middle of the Asian session for some indices, such as the
FTSE. However, the struggle for the likes of the German
DAX was plain to see. Even if then indices manage to fully recover back to their closing levels on Friday, this will not necessarily mean the bulls are out of danger.
Renewed selling pressure may well resume,
if there are no steps taken from Ukraine and more importantly Russia to start peace talks.
Crucially,
crude oil and precious metals have already filled their respective overnight gaps, so how these markets will behave going forward will give us clues as to what to expect for indices for the rest of the day. I reckon safe-haven
gold will find renewed buying momentum and head towards
$2000 in the coming days.
The crippling sanctions on Russian economy, institutions and individuals will continue to weigh on the
Russian Ruble, which has surged passed the 100.00 level against USD for the first time ever, despite more than doubling interest rates to 20% and other efforts from the Russian central bank.
What the sanctions mean for Russia and global markets
One of the
toughest sanctions imposed on Russia yet was the announcement that certain banks are to be removed from
SWIFT. Another significant sanction announced at the weekend was the
freezing of Central Bank of Russia (CBR) assets. This is big. I will explain why shortly, but clearly these steps caught some investors off guard as until Friday evening some Western countries were against these ideas. This partly explains why we saw that big rally on Friday, and the subsequent sell-off today. A ban on Russian oligarchs from using financial assets in Western markets was always coming, so no surprises there. Also spooking the market was Putin ordering Russia's military to put its deterrence forces, which include nuclear weapons, on "special alert," raising some concerns over a nuclear war.
Sanctioning the
Central Bank of Russia (CBR) is a bold move. Although the CBR has a lot of reserves, these could diminish quickly as the central bank fights the Ruble’s collapse by selling its dollar and other foreign currencies it holds in reserve. The ruble could collapse if those reserves ran out. So far, the official response from the CBR has been the hike in interest rates to 20%, which is huge and puts the CBR in the same category as the CBRT, Turkey’s central bank. If the collapse in the lira was anything to go by last year, it isn’t going to be a great year for the ruble this year… as it is already proving to be the case.
This together with a SWIFT ban is going to detach Russia from the rest of the world, and heap significant pressure on Putin.
Russia vs. West: What is the biggest global risk?
In as far as the global energy market is concerned is a big oil and/or gas supply shock. In two words: more inflation.
If Russia decides to ban all energy exports to Europe or Europe decides to ban energy imports from Russia, this will see the already-very-high energy prices sky-rocket. Make no mistake about it, this will trigger a massive risk-off event for the financial markets. This will also rush central banks such as the Fed and ECB to tighten their policies aggressively to prevent hyper inflation risks.
This is an option Putin might highlight or even exercise as he potentially goes all in, given that the west has called his bluffs until now.
These stocks and sectors were on the move on Monday
Healthcare has performed the best due to defensive flows and after German Chancellor Scholz’s announcement that his government will supply €100 billion for military investments from the 2022 budget. Stocks such as
Rheinmetall,
Leonardo and
BAE System have all surged higher. On the flip side, the removal of SWIFT has weighed heavily – as you would expect – on
European banks that have exposure to their Russian counterparts. Raiffeisen Bank and ING were taking the brunt off the sector’s falls, while the likes of
SocGen and
Deutsche were also hit hard. Shares in
BP plunged after the energy firm announced that it will exit 20% shareholding in Rosneft and other businesses with Rosneft in Russia, carmaker
Renault saw its shares go on further sale due to its operational exposure to Russia.
Looking ahead to the rest of the week
Last week was one hell of a week for volatility as investors responded to events unfolding in Ukraine and the response from the West in terms of sanctions on Russia. Stocks dropped on Monday, rallied on Tuesday, plunged again on Wednesday and then surged sharply higher on Thursday, before extending those gains on Friday. The end result? A roller-coaster ride to nowhere, as all major global indices closed slightly higher or around the flat line, except markets in China and Germany. Crude oil also behaved in a similar fashion after surging through $100 before sliding back below that hurdle later in the week. Safe-have gold got very close to $2K, before sliding at the back end of the week as investors bought equities.
The start of this week has been, as mentioned, quite bearish for risk assets. As we head deeper into the new week, the situation in Ukraine and war of words between Russia and the West will continue to dictate sentiment in the short term, lessening the impact of the upcoming economic data releases (see below). There is hope for some sort of peace after Kremlin said Putin had agreed to organize negotiations with Ukraine's Zelensky. But the situation remains perilous and there are no guarantees.
Away from geopolitics: Fed’s policy response to inflation
Meanwhile, investors’ attention may slowly turn away from geopolitics as we approach March, which is going to be another significant month in the markets as the Fed will finally hike interest rates, potentially starting a major tightening cycle this year as it tries to tackle surging inflationary pressures. St Louis Fed President James Bullard has again repeated that he supports 100 basis points rise by the end of June, adding that there is limited connection between events unfolding in Ukraine and the US economy, where inflation is getting very hot. The latest data continue to point to higher prices. The Fed’s favourite inflation measure came out ahead of expectations on Friday as the core PCE price index rose to its highest level since 1982, well before I was born. It climbed to 5.2% year-over-year in January, up from 4.9% in December.
Data highlights for the week ahead
After what has been a very volatile month, window dressing by fund managers in the first day of the week, and further Ukraine-related volatility, have already seen the markets move sharply. Later in the week, we will get one last snapshot of the US non-farm jobs report and wages, while the latest CPI measure of inflation will come out the following week, before the FOMC meets on March 16. These figures might be deciding factor between a 25- or 50-basis-point rate hike. Here is what’s on the agenda in the week ahead:
Tuesday
Due to the prolonged lockdowns in Australia and somewhat subdued 2.3% wage growth in the last quarter, the RBA is likely to keep policy unchanged 0.1% at this meeting. The focus will be on the language it uses to prepare the market for a hike around August. If it indicates an earlier rate rise, then the Aussie could rally.
Wednesday
Unlike the RBA, the BOC is expected to hike by 25 basis points, especially in light of the upsurge in oil prices and the improvement in Canadian economic data of late.
Eurozone CPI is expected to hit a fresh record high of 5.3% and this will surely put pressure on the ECB to tighten its policy sooner. Will the euro finally stage a rally?
Thursday