MARKET WRAPS
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Opening Call:
Most European stock markets face further losses Wednesday, as Russia stepped up attacks on Ukrainian cities. In Asia, shares were broadly lower; the dollar steadied after early losses; Treasury yields and oil gained; and gold fell in a likely technical adjustment.
Equities:
Most European benchmarks will likely extend losses early Wednesday as the fighting in Ukraine intensified. However, with Brent above $110, the oil majors in London should help lift the FTSE 100 into positive territory.
Russian forces, frustrated in plans for a quick victory, shifted to a new strategy of pummeling civilian areas in an attempt to demoralize Ukrainian resistance and reignite their slowing military advance.
On Tuesday, Russia's Defense Ministry said it would strike Ukrainian intelligence and communications facilities in central Kyiv that it said are being used for "information attacks" against Russia, and urged residents living nearby to leave for their own safety. Western diplomats took the warning as a signal that a massive strike on Kyiv's residential areas was imminent. Some of the remaining staff at foreign embassies left Ukraine's capital.
U.S. stock-index futures moved slightly higher early Wednesday as Joe Biden delivered a crucial State of the Union address, focused heavily on the Russian invasion of Ukraine, the battle against Covid and a plan to fight surging inflation.
In regular trade Tuesday, the Dow shed almost 600 points as U.S. stocks ended sharply lower, with the financial sector leading the declines.
"Investors fear that Russia has gone too far to blink first," said Fawad Razaqzada, analyst at ThinkMarkets. "If you ever wondered how headline-driven markets looked like, well this is it."
Economic Insight:
The escalation in the Russia-Ukraine conflict has introduced severe upside risks to Germany's inflation outlook, said Berenberg. Wholesale gas prices are set to settle above the already elevated level from before the invasion, it said. Prices for other commodities and food are also likely to increase.
"These higher prices will then be passed on to consumers in the form of higher electricity and gas bills and may also show up in other goods categories," said Berenberg. Fiscal policy will also become more expansionary, both in the eurozone and in Germany, providing a further boost to inflation pressures, Berenberg added.
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An extended conflict could bring stagflation, warned MSCI Research. Under a "grimmer" scenario of extended warfare, "upward-spiraling oil prices exert stagflationary pressures on the economy, a portfolio of global equities, bonds and real estate could lose up to 13%," MSCI said.
Surging inflation under this scenario is painful for central banks to combat, inflationary expectations deteriorate and "central banks are caught between two fires and cannot postpone monetary tightening for very long."
Forex:
The dollar steadied following earlier weakness, as gains in U.S. stock futures helped spur some mild risk appetite in Asian markets.
IG said the Russia-Ukraine military conflict clearly shows no signs of easing, adding to concerns of further economic disruptions and more persistent pricing pressures ahead.
Corpay's Karl Schamotta said Tuesday: "Currency traders are in sell-first, ask-questions-later mode. The yen and dollar are winning a 'reverse beauty contest', with funds flowing into the least-unattractive alternatives as the euro and pound tumble."
BMO Capital Markets said the euro-dollar exchange rate may benefit to some extent if the Federal Reserve raises interest rates at a slower-than-expected pace.
"If the Fed is forced to move more slowly than what is priced into the curve by a significant margin, that will assist the European Central Bank on the currency aspect of side of the equation to a degree, depending on how bad [or not]developments in Eastern Europe are."
Nevertheless, the path of EUR/USD and possibly the ECB's response will probably be more driven by headlines on the Ukraine crisis than interest rate differentials in the short-term, BMO said.
The Fed:
Capital Economics said the war in Ukraine is very unlikely to dissuade Fed officials from pushing ahead with monetary policy tightening. The conflict is expected to have little impact on the U.S. economy, although it will prevent inflation to fall as much as it otherwise would have been in the coming months.
"We'll be watching for any hints from Jerome Powell at his congressional testimony [Wednesday] but, while we suspect the increased uncertainty makes a 50 basis points rate hike next month even less likely, we still expect the Fed to raise rates by 25 basis points at least four times this year."
Bonds:
Treasury yields edged higher in Asia, after Tuesday's aggressive rally in bonds gave the 10-year yield its biggest two-day drop since March 2020.
Investors are weighing the implications of the Russian invasion of Ukraine on the outlook for inflation and global growth, as well as how central banks, particularly the Fed, will respond. The uncertainty has prompted traders to less aggressively price in big rate increases by the Fed and other major central banks.
Rate futures were pricing in zero chance the Fed would hike interest rates by a half-point this month. That's down from 41% a week ago, according to probabilities derived in the CME FedWatch tool. The market is now pricing in a 96% chance of a quarter-point increase and 4% chance of no change.
"While the war in Ukraine has finally triggered a big drop in developed market sovereign bond yields, we think the likely inflationary impact of the war limits the scope for a sustained rally in [Discount Margin] bonds, especially outside the euro-zone," said Capital Economics late Tuesday.
Energy:
Oil futures rose more than 5% in Asia, extending their rally on concerns that buyers will be hesitant to take Russia's crude.
Global companies and countries are either disassociating themselves from Russian companies voluntarily or being prevented from trading due to sanctions, including for oil, which is putting stress on oil markets, said NAB.
The WSJ said key European financiers to commodity trade houses have already begun curbing financing for commodities, as are Chinese banks, NAB added.
Goldman Sachs said the IEA's release of 60 million barrels of emergency reserves in response to high prices likely won't be enough to prevent further gains for crude.
"We do not view this as sufficient relief, representing an only one-month offset to a potential disruption to one-third of Russia's 6 million barrel/day seaborne oil export flows. This leaves risk to our one-month $115/bbl Brent price forecast still skewed to the upside."
Other News:
The API reported inventories of crude oil in the U.S. surprisingly fell by a large 6.1 million barrels in the latest week, a source citing the data said, with gasoline supplies falling by 2.5 million barrels.
The bullish results, which some analysts said could suggest Russia-related global shortages are already starting to be felt, were released ahead of official inventories data from the DOE due later Wednesday.
Average forecasts in a WSJ survey indicate the DOE report will show crude rose by 2.2 million barrels from the previous week and that gasoline supplies decreased by 1.4 million barrels.
Metals:
Gold futures were slightly lower in a likely technical correction after futures marked their highest finish in 13 months Tuesday.
However, the precious metal's decline may be limited. The escalation of the Ukraine conflict has boosted demand for havens, with gold also seen as an inflation hedge, said Phillip Nova.
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Aluminum and nickel prices rose after shipping companies suspended services to Russia, said ANZ. It thinks the suspension of services by Maersk, which handles some shipments for Russian aluminum producer Rusal, poses a risk for exports of the metal.
TODAY'S TOP HEADLINES
Biden's State of the Union Address Pushes Unity Against Russia, Battle Against Inflation
WASHINGTON-President Biden said that Russian President Vladimir Putin is more isolated from the rest of the world than ever after invading Ukraine, using Tuesday's State of the Union address to highlight the coordinated response of the United States and allies and rally Americans behind defending democracy.
Oil Tops $110 as Russia Struggles to Maintain Energy Sales
Benchmark global oil prices surged above $110 a barrel, hitting a multiyear high, as concern mounted that Russia's growing economic isolation since its invasion of Ukraine would disrupt global energy supplies.
The latest run-up came even after members of the International Energy Agency agreed Tuesday to release supplies from their oil reserves, and despite efforts by Western governments to exclude oil and gas from their sanctions on Russia.
Russia Targets Ukrainian Civilian Areas in Shift to Demoralize Resistance
KYIV, Ukraine-Russian forces, frustrated in plans for a quick victory, shifted to a new strategy of pummeling civilian areas in an attempt to demoralize Ukrainian resistance and reignite their slowing military advance.
On Tuesday afternoon, Russia's Defense Ministry said it would strike Ukrainian intelligence and communications facilities in central Kyiv that it said are being used for "information attacks" against Russia, and urged residents living nearby to leave for their own safety. Western diplomats took the warning as a signal that a massive strike on Kyiv's residential areas was imminent. Some of the remaining staff at foreign embassies left Ukraine's capital.
Apple, Ford Retreat From Russia; Volkswagen Warns of Disruption
(MORE TO FOLLOW) Dow Jones Newswires
03-02-22 0029ET
