Short-term trading dominated by a new wave of risk aversion
In the past, the impact of (geo)political tensions on global markets often tended to be relatively short-lived. Late last week it seemed like global markets were again inclined to adopt a similar scenario. Investors apparently assumed that the Russian military action could soon be concluded and could lead to a “new political balance” in Ukraine (possible negotiations? Neutrality?). European (EuroStoxx +3.69%) and American (S&P +2.24%) equities rebounded. European/German bond investors also exited most of their safe-haven positioning and also cautiously focused on rising inflationary risks. The German curve rose 3.2 bps/3.9 bps in the 2 & 30 year sector and 5.9 bps/7.1 bps elsewhere. Even intra-EMU spreads showed signs of easing tensions. US yields which already reversed most of their safe haven decline on Wednesday and Thursday closed with less than 1 bp changes. Oil fell (temporarily) below $100 a barrel. The Dollar (DXY) eased to close near 96.6. EUR/USD rallied to close at 1.1268.
However, the political and military developments over the weekend clearly reversed the positive mood of investors on Friday. It is said that Russia and Ukraine are preparing negotiations near the Belarusian-Ukrainian border, but it is unclear whether this will yield a short-term result. President Putin’s warning about his nuclear deterrent only illustrated a further escalation in the conflict. At the same time, markets ponder the potential consequences for the economy and financial system after Western allies decided to unlink some Russian banks from the Swift payment system and took restrictive measures limiting the Russian central bank to the use of its international reserves . At the opening of the Asian markets, the ruble was in free fall. The Russian central bank raised the key rate from 9.5% to 20%. In volatile trade, the Russian currency is trading near 105 USD/RUB after a noticeably weaker opening. Brent oil ($103 a barrel) jumped again, as did several other commodities. Spillovers to Asian equity markets remain modest with Hong Kong losing around 1.0% but countries like Japan (+0.2%) and Australia (0.73%) are trading in positive territory. US Treasuries are rallying with yields at shorter maturities down as much as 9 basis points. The TW dollar is regaining the 97.00 barrier. However, the yuan is also benefiting from a sort of safe bid, with USD/CNY falling to the 6.3125 area. EUR/USD fell to the mid zone of 1.11.
Late last week, it looks like key green data to be released in the US (payrolls) and Europe (inflation) this week may regain market attention ahead of the Fed’s upcoming March meetings. and the ECB. However, in the short term trading on US markets and even more so on European markets will be dominated by a new wave of risk aversion. Even after last week’s rebound, the technical picture for stocks like the EuroStoxx50 remains fragile and futures are suggesting another wave of selling. German Bunds and Treasuries will remain well rated. More interesting: will European swap rates continue to be as rigid as they have been recently? On FX, EUR/USD may opt for a retest of 1.1121/06 support. A break down would only complicate the reaction function of the ECB as it would increase inflationary risks. Also keep a close eye on the EC currencies with EUR/PLN (3.67) and EUR/HUF (370) approaching levels that are essential in the BC’s anti-inflation strategy.
Australian retail sales rebounded 1.8% m/m in January after falling 4.4% in December, even amid a new Covid outbreak with the omicron variant. A more modest increase of 0.3% was expected. Food retailing recorded the largest sales increase last month, up 2.2% in the biggest monthly increase since July 2021. Sales at cafes, restaurants and takeaways fell by 0.8%. The strong data reinforces the RBA’s case that omicron will not derail the recovery. The central bank meets tomorrow. It should keep the key rate stable at 0.10%. The Australian dollar fell slightly this morning in a move of risk aversion. AUD/USD is trading around the big figure of 0.72.
President Joe Biden’s approval rating has fallen to an all-time low, according to a new Washington Post-ABC News poll. 37% said they approve of the work Biden is doing while 55% said they disapprove. Asked specifically about how Biden is handling the economy, 37% said they approve versus 58% disapprove. Half of those polled disapproved of the president’s handling of the pandemic. The results come a day before Biden’s first state of the union.