MARKET WRAPS
Watch For:
Germany CPI, Labour Cost Index; UK Index of Production, Index of Services, Trade, Monthly GDP Estimates, BOE/Kantar Inflation Attitudes Survey, NIESR Monthly GDP Tracker; Italy Labour Cost Index; EU national leaders discuss Ukraine at Versailles summit; updates from Lanxess, EssilorLuxottica, Ceconomy, Daimler, Deutsche Bank, BNP Paribas, Fraport, DWS Group, Telia
Opening Call:
European shares are seen in retreat again Friday as the Ukraine war and fears over inflation dominate global markets. In Asia, stocks tumbled across the board; the dollar held gains; oil edged up; and Treasury yields and gold eased lower.
Equities:
European and U.S. stock-index futures were lower again Friday, as uncertainty over the war in Ukraine and soaring inflation continue to dampen sentiment.
Asian shares were deep in the red following losses on Wall Street, although all three U.S. indexes closed above their session lows Thursday.
Investors are worried about the global economic outlook, sapping their appetites for riskier assets in recent days.
"There's no optimism," said Michael Batnick, Director of Research at Ritholtz Wealth Management. "If you look at the investor sentiment survey, the spread between bulls and bears remains pretty low. In fact, if you're looking for a glimmer of hope, it's that no one is bullish."
Read: EU Leaders Say More Sanctions Coming for Russia, Belarus
Forex:
The dollar held Thursday's gains in Asia as risk-off sentiment dominated the local markets.
Bank of America said the Ukraine war has come alongside lower overall G10 forex liquidity, but a closer look suggests it has been mostly a European theme. It said that overall, forex liquidity developments underscore the importance of a country's proximity to the conflict, and energy-import dependence.
"On the other hand, the response of the non-European G10 FX has been very measured. We note the yen has safeguarded its haven status, with USD/JPY remaining the most liquidity dollar cross, while we find notable the improvement in Australian dollar liquidity despite the market turmoil, which is entirely in line with the price action."
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The euro should strengthen versus sterling as the European Central Bank is playing catch up with the Bank of England by signalling it will withdraw support at a faster pace, said TD Securities.
The process of ECB policy normalization and convergence with the BOE supports TD's recommendation to buy EUR/GBP. Notably the ECB raised its inflation forecast for 2024 to 1.9%, which is near its 2% target, indicating that it is getting very close to reaching the conditions to raise interest rates. TD has targeted EUR/GBP rising to 0.8600 and has a stop loss of 0.8020.
The Fed:
The Federal Reserve will likely dial back its interest rate tightening this year as it juggles a rising inflation rate with the economic effects of the war, said David Rubenstein, co-founder and co-chairman of Carlyle Group.
Once inflation "gets in the system, it's very difficult to get out," said Rubenstein. Before the war, the markets expected the Fed could tighten several times; now the expectation is four or five times, he said.
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Thursday's inflation data sets the stage for a 25 basis points rate increase next week, said Bank of America.
"Inflation breakevens declined across the curve and real rates increased on the print, suggesting that the market was setting up for a beat. The print endorses our view for a 25bps Fed rate hike next week."
It said trading after the data release also pointed to "fading odds for a larger than 25bps hike next week."
Bonds:
The 10-year Treasury yield fell back below the 2% level in Asia.
The benchmark lost some ground Thursday after the dismal inflation data but bounced back to pierce 2% and hit its highest since Feb. 16. The yield's recent decline has been attributed to a risk-off sentiment in global markets triggered by the war, but that mood changed this week as investors focused on the expected rate increase by the Fed to fight inflation.
"High inflation has taken root," said Amherst Pierpont's Stephen Stanley, adding a best-case scenario would be core inflation easing to 4% by the end of the year from 6.4% currently.
Energy:
Oil futures gave up early gains in Asia to trade near-flat, as Russia played down the severity of U.S. sanctions on its crude exports, said SSY Futures.
"Russia tried to downplay concerns that buyers were shunning its oil, with its foreign minister saying that it had enough buyers for its oil and gas even as Western allies impose sanctions."
A stronger dollar was also a headwind for oil prices, SSY added.
ANZ said the sanctions on Russian crude risked a supply shock in the market. "At stake is 5 million barrels/day of oil, which will be difficult to replace."
OPEC members are struggling to increase their oil output, given limited spare capacity with only Iraq and Saudi Arabia likely able to reasonably boost production, ANZ said.
Other News:
The recycling and reprocessing of batteries will be larger than the entire mining industry by about mid-century, said JB Straubel, founder and CEO of Nevada-based Redwood Materials, which collects waste battery materials and breaks them down to reprocess them for sale back into the supply chain.
The battery recycling industry is unlikely to have much impact on the traditional mining industry for years, though, Straubel said. He co-founded Tesla and was its longtime chief technology officer.
"We're in such a hyper growth phase in this industry that we need a lot of mining and all the recycling we can possibly do." Straubel said that automakers are starting to get involved in batteries "all the way back to the mine."
Metals:
Gold futures were slightly weaker, weighed by a stronger dollar, though increased risk aversion in Asia may continue to support prices.
"Wall Street is going back into risk aversion mode as Russia seems poised to continue to move forward with its attack on Ukraine," OANDA said.
Aluminum prices gained on continued concerns over supply disruptions. ANZ said the U.K. has announced sanctions on Russian individuals including Oleg Deripaska, who has a stake in Rusal, one of the world's top aluminum producers. The sanctions are raising risks of supply disruptions as companies shun their involvement with Russia, ANZ added.
Other News:
Rio Tinto's decision to sever all commercial relationships with Russian businesses should have direct implications for supply and offtake agreements with Rusal's Aughinish alumina smelter, Europe's largest alumina refinery, said RBC Capital Markets.
"If we assume that Rusal is unable to source bauxite from external sources, the refinery could lose up to roughly 500,000 [metric] tons per annum [of] alumina which implies an impact of roughly 265,000 tons per annum on aluminum production [circa 0.4% of total global production] in due course."
RBC noted there was uncertainty over how much bauxite Rio Tinto provides to the operation and the timing of Rio Tinto's termination of its contracts. Bauxite stockpiles should enable full production to continue in the short-term.
TODAY'S TOP HEADLINES
Biden to Call for Revoking Normal Trade Relations With Russia
WASHINGTON-President Biden on Friday is expected to announce that the U.S. will join major allies and the European Union in calling to revoke normal trade relations with Russia, according to a person familiar with the decision.
The decision is in concert with the EU and Group of Seven nations to punish Russia over its invasion of Ukraine, the official said.
EU Leaders Say More Sanctions Coming for Russia, Belarus
European Union leaders pledged to increase further the economic pressure on Russia and Belarus over the invasion of Ukraine following a long summit meeting outside Paris at Versailles, where divisions emerged over Ukraine's future links to the bloc.
In a statement published after the first day of the meeting ended in the early hours of Friday morning, the leaders said, "We are determined to increase even further our pressure on Russia and Belarus."
Senate Passes $1.5 Trillion Spending Bill That Includes Aid for Ukraine
WASHINGTON-The Senate passed a $1.5 trillion package to fund the federal government for the current fiscal year, after Democrats and Republicans resolved months of wrangling to quickly send aid to Ukraine.
The measure was approved 68-31 and now heads to President Biden's desk, one day before a temporary funding measure was set to expire and set in motion a partial government shutdown.
Economic Blacklist of Russia Marks New Blow for Globalization
WASHINGTON-The U.S.-led effort to expel Russia from international commerce marks another fracture in the free-trade vision that guided American policy for nearly 30 years, signaling a future where nations and companies shift away from trading with adversaries and focus more on like-minded partners.
The actions taken by the U.S. and Western European allies since Russia invaded Ukraine have been swift and punishing-including banning or scaling back purchases of Russian oil, gas and coal to pressure Russian President Vladimir Putin to call off his troops.
Europe to Weigh Emergency Measures to Limit Electricity Prices
The European Union should consider emergency measures in the coming weeks that could include temporary limits on electricity prices, European Commission President Ursula von der Leyen told leaders at an EU summit in Versailles on Thursday.
The reference to the possible measures was contained in a slide deck Ms. von der Leyen used to discuss efforts to curb the EU's reliance on Russian energy imports, which last year accounted for about 40% of its natural-gas consumption. The slides were posted to Ms. von der Leyen's Twitter account.
Ukraine War Pushes Biden Toward Venezuela, Iran and Saudi Arabia in Oil Hunt
(MORE TO FOLLOW) Dow Jones Newswires
03-11-22 0026ET
