MARKET WRAPS
Watch For:
UK monthly unemployment figures; Flash Estimate GDP; EU Flash estimate employment EU and euro area; Germany ZEW Indicator of Economic Sentiment; updates from Volkswagen, Siemens Healthineers, home24, Glencore, Koninklijke DSM, Yandex.
Opening Call:
Stock could open lower on continuing geopolitical tensions between Russia and Ukraine. U.S. stocks futures were pointing lower. The dollar weakened in Asia, while haven currencies JPY and CHF strengthened. The yield on the 10-year Treasury note was spotted at 1.979%, compared with 1.995% on Monday. Oil prices fell on a possible technical correction. Gold was steady.
Equities:
European stocks are set to open lower at the open as investors continue to monitor Russia-Ukrainse tensions.
Nations are still searching for a diplomatic solution to the situation and Russia's top diplomat advised Russian President Vladimir Putin to continue a dialogue with the U.S. and its allies.
"The market is really paying attention to geopolitical stuff right now, whether it's stuff out of Ukraine or in D.C. with respect to what the Fed is going to do," said Willie Delwiche, investment strategist at All Star Charts.
"The bigger story is inflation and rates. The Fed is catching up to inflation, the bond market is now taking the Fed seriously and the question is 'what do U.S. stocks do in that environment?
Investors also have their eye on the latest round of corporate earnings, in part to get a better understanding of how companies are dealing with high inflation. Some of the more notable companies reporting earnings this week include Airbnb on Tuesday, DoorDash on Wednesday and Walmart on Thursday.
Investors will also get more updates on inflation and how that might be impacting spending. The Labor Department will release its January report for prices at the wholesale level on Tuesday and the Commerce Department will release its January retail sales report on Wednesday.
Forex:
The dollar weakened in early Asia. "The near-term outlook for USD crosses will likely depend on the evolving Russia-Ukraine situation and any Fed communication ahead of the March 15-16 FOMC meeting," Goldman Sachs said.
The firm thinks the Fed will raise rates by 25 basis points, while market pricing is leaning toward 50, adding it'll need to keep an eye on public remarks over the coming days.
The firm also upgraded its forecasts for EUR/USD in light of the ECB's expected exit from the negative interest-rate policy era. Goldman's "not sure if this is the end of our 'Yuan engine, Euro caboose' thesis, but ECB rate hikes do open another avenue for possible broad Dollar depreciation over the medium-term."
Other Currencies:
Sterling may recover somewhat versus the euro in the near-term if U.K. economic data on employment, inflation and retail sales later this week meet market expectations but the gains won't last, Rabobank said.
The data could support expectations the BOE will raise interest rates further while ECB officials have been "reinforcing the cautious, data-driven nature of their policy outlook," Rabobank forex strategist Jane Foley said in a note.
By mid-year sterling will have "lost its footing" as the U.K.'s rising cost of living prompts the market to reassess its BOE rate rise expectations, she said. Rabobank sees EUR/GBP rising to 0.85 in three months from 0.8368 currently.
The euro is likely to fall to $1.08 in the next 12 months from $1.1321 currently as the Fed raises interest rates by more than the ECB, Danske Bank said.
"Essentially, Fed wants to act in a way which ensures inflation starts to decline over the coming year," Danske Bank analysts say in a note.
That should act as a strong tightening of financial conditions over 2022 and support the dollar, they said. The ECB will also raise rates, though moderately, they said. Meanwhile, the euro is overvalued and European economic data look set to disappoint, they said.
JPY strengthened against most G-10 and Asian currencies as risk aversion spurred by ongoing Russia-Ukraine tensions increases the safe-haven appeal of the yen.
Sentiment is fragile and safe havens are outperforming in foreign-exchange markets, with JPY and CHF both getting some love, Pepperstone said.
Bonds:
The yield on the 10-year Treasury note was 1.979%, compared with 1.995% on Monday.
U.S. Treasury yields bounced higher Monday after Russia's foreign minister suggested that talks over Ukraine with the U.S. and its allies should continue, but moderated the rise as investors remained jittery over the potential for a Russian invasion of its neighbor.
Investors also continued to assess the speed and scope of rate increases and other measures by the Federal Reserve as policy makers attempt to inflation that continues to run at its hottest in nearly 40 years.
"Fixed-income markets are clearly caught between the specter of policy tightening, particularly from the Fed, which looks set to lift yields, and the geopolitical tensions surrounding Ukraine, which seem set to lower yields in the short-term," said Steve Barrow, head of G-10 strategy at Standard Bank, in a note.
"The yield curve has flattened aggressively on fear of a Fed policy error, with the spread between the 10-year and 2-year at the lowest level since the beginning of the pandemic," said Mark Hackett, chief of investment research at Nationwide, in a note.
Energy:
Oil fell in the early morning Asian session on a possible technical correction after front-month WTI crude oil futures settled at the highest level since September 2014.
However, Oanda reckons that a very tight oil market and geopolitical tensions over Ukraine are prompting energy traders to eye a rise in crude prices above $100/bbl. Demand continues to improve while global inventories remain at depressed levels, Oanda added.
Russian trade has typically stood up well during past sanctions, commodities consultancy Wood Mackenzie points out, though it notes that previous policies have been very targeted, typically focused on individuals or specific companies.
As the market closely watches the threat of Russia invading Ukraine, "a Europe-wide or U.N.-led global approach would be a unique challenge," it said.
The most likely outcome of any strict EU sanctions regime will be a reshuffle of trade, especially in coal, Wood Mackenzie said, although "the shift will be messy, and there are often more constraints than expected due to quality differences."
Suppliers also don't like to divert shipments when there is no guarantee how long any sanctions might last, it said.
Metals:
Gold was little changed in the morning Asian session, supported by Russia-Ukraine tensions. Fears of a possible Russian invasion of Ukraine have boosted the bullion's haven appeal, Phillip Nova said.
Also, weekly momentum technical indicators and buy-the-dip strategy suggest the path of least resistance is higher for the precious metal, with most traders expecting higher volatility to be a mainstay of gold markets for a while, Phillip Nova said.
Aluminum and nickel were higher amid ongoing Russia-Ukraine tensions. Rising fears over supply disruptions are clouding the market outlook, ING said.
It points out that Russian metal producer Norlisk Nickel holds around 10% of the world's nickel supply, while Rusal, another Russian company, accounts for about 5% of global aluminum production.
"Any disruptions would tighten markets which are already looking very tight," ING said. The three-month LME aluminum contract is 0.3% higher, while the three-month LME nickel contract rises 0.9%.
Soaring electricity prices have already caused a string of aluminum curtailments across Europe, and Wood Mackenzie said a further roughly 400,000 metric tons of aluminum capacity is at risk of shutting down if prices rise further.
The commodities consulting firm says it is worried that conflict in Ukraine could spark higher power prices.
"Europe accounted for 15% of ex-China aluminum supply in 2021 and thus supply cuts could have a material effect on prices for refined metal," the firm says. Power bills account for roughly 35% of the cost of making aluminum, although at some European smelters it is even more, Wood Mackenzie said.
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02-15-22 0030ET
