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Opening Call:
Equities in Europe are set for a positive start Monday, but gains are seen capped as investors weigh the latest headlines on Ukraine. Asian stocks were mostly lower, along with oil and gold, while the dollar and Treasury yields advanced. U.S. stock futures edged higher at the start of a week in which the Fed is expected to raise its benchmark interest rate for the first time since 2018.
Equities:
European shares were poised for opening gains Monday despite heightened tensions over the war in Ukraine.
Investors in Asia remained on edge following news of a Russian airstrike on a Ukrainian military training center close to the Polish border that killed at least 35 and increased the risk of war encroaching on NATO territory.
The attack, about 10 miles from the Polish border early Sunday, was far to the west of where the conflict has been concentrated, and happened a day after Moscow had warned the West that it would consider arms deliveries to Ukraine as legitimate targets.
A large portion of the military aid from the West-one of the largest transfers of arms in history-passes through Poland into western Ukraine, part of the fine line the U.S. and its NATO allies are walking between aiding Ukraine militarily while steering clear of providing troops or enforcing a no-fly zone that Ukraine has called for.
Read more here.
Market Insight:
Capital Economics said commodity prices are likely to remain volatile in the coming weeks, as investors digest developments in Ukraine and its consequences for commodity markets.
"On balance, though, the risks to prices are still very much skewed to the upside, not least as the West could further tighten restrictions on Russia's commodity exports."
While events in Ukraine will very much be driving commodity price direction this week, China's activity data due Tuesday will also paint a clearer picture of Chinese demand.
"We think these data will come in weaker than the consensus expects, which would support our view that China's demand for commodities is set to remain soft this year."
Forex:
The dollar continued to strengthen in Asia as worries over the Ukraine war and this week's FOMC meeting dragged on sentiment.
Capital Economics expects a 25bp Fed hike this week and "continued commitment to an aggressive tightening cycle, which may reignite the dollar rally."
Currency markets are seeing higher implied volatility, said Corpay's Karl Schamotta and Karthik Sankaran.
"Expectations of rate-hikes this year are being recalibrated lower, but the relative pace of monetary-policy tightening across developed markets is still expected to favor the dollar," they said.
"G7 action on immobilizing Russia's huge reserve pile could lead to attempts by other countries to reduce dollar usage over time, but the extent of US-EU coordination will make it difficult as the euro is the only other comparable vehicle."
Unicredit Research said the euro-dollar exchange rate faces further volatility in the coming week.
"The conflict is seen as a drag mainly for the eurozone and Eastern European countries, and thus EUR/USD and [the Polish zloty, Hungarian forint and Czech koruna] are at risk of further significant fluctuations reflecting swings in market sentiment."
Other News:
TD Securities said buy USD/JPY, citing economic fundamentals and technical charts. The currency pair is a better expression of U.S.-centric risks, particularly the Fed, TD said, noting markets appear to be underpriced for 2023 rate increases and is a risk that may be realized in dot-plot at this week's FOMC meeting.
On charts, USD/JPY has nowhere to go but up, particularly now that 116.40 triple top has been breached, TD said, which entered a long USD/JPY position targeting 120.00 and a stop-loss order at 115.30.
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The Bank of England is likely to raise interest rates at its next meeting but sound cautious in its messaging about the pace of further rises, potentially weakening sterling, said BDSwiss Group.
The BOE is widely expected to raise its key rate by 25 basis points at its March 17 meeting, in line with February's rise. However, uncertainty over Ukraine means that there will be fewer policy makers voting in favor of lifting rates by a larger 50bps compared with last month when four out of nine officials backed such a move.
"That might lower the odds of a 50bp hike at the next two meetings, which would be negative for the pound," BDSwiss said.
Bonds:
The 10-year Treasury note yield remained firmly above 2% early Monday, extending its rise into a sixth straight session ahead of what is expected to be the first in a series of Fed rate rises.
"Given the focus on tamping down inflation, there is a fear that the Fed could move too fast and threaten growth," said Lindsey Bell, chief markets and money strategist for Ally.
"GDP growth could come under pressure in the coming quarters amid high inflation and weak consumer sentiment. The conflict in Ukraine is the wild card in this scenario. De-escalation will be necessary to reduce inflationary pressures."
Other News:
S&P said it was keeping Ukraine's 'B-/B' long- and short-term foreign and local currency ratings on CreditWatch with negative implications.
"The CreditWatch status indicates that we could lower the ratings if the military conflict were to significantly weaken Ukraine's economy," S&P said. It expects Ukraine's debt service and borrowing needs "will be fully covered by international financial support over at least the next 12 months."
However, S&P also said Russia's military intervention poses significant risks to Ukraine's economic growth, public finances and financial stability. S&P said "as the conflict continues, Ukraine's technical ability to use international financial support and meet its ongoing debt service obligations could erode."
Energy:
Oil prices were down around 2% in Asia, likely weighed by the latest Covid-19 developments in China, said ING.
"The rising number of cases has seen the city of Shenzhen go into lockdown. This will raise concern over the potential hit to demand. But also importantly, it suggests that China is not ready to let go of its zero-Covid policy."
ING also noted that ICE Brent speculators decreased their net long positions last week, signaling increased risk-aversion in the oil futures market.
Oil prices, which have been driven higher by the Ukraine war, may have been weighed by Vladimir Putin's reported comments that there are "certain positive shifts" in the negotiations between the two countries.
Metals:
Gold futures edged lower as hopes for progress in the Russia-Ukraine talks diminished the safe-haven appeal of bullion.
While Putin's comments are likely giving market participants hope that cease-fire talks are heading in the right direction, economic growth concerns are unlikely to go away anytime soon, hence gold's pullback should be limited, said OANDA.
Aluminum prices were lower too, reversing earlier gains that were spurred by supply disruption concerns, said ANZ.
The gains were mostly due to the U.K. announcing sanctions on Russian individuals, including Oleg Deripaska, who has a stake in state-owned mining company Rusal and after Rio Tinto said it was planning to stop shipments to a Rusal-owned alumina plant.
Read: JPMorgan Leads Talks to Contain Nickel Crisis Damage
Other News:
Fitch said nickel and aluminum prices are set to stay high on likely sizable disruptions to Russian production and exports of the industrial metals.
"We are expecting significant prolonged disruption in the coming months at least, which makes up 9% and 5% of global production, respectively."
It said that low global inventories of both metals, due to high electric-vehicle adoption, have made them particularly vulnerable to price surges. "Depleted inventories will be an important factor in the coming weeks as demand chases restricted supply."
TODAY'S TOP HEADLINES
Russian Prosecutors Warn Western Companies of Arrests, Asset Seizures
Russian prosecutors have issued warnings to Western companies in Russia, threatening to arrest corporate leaders there who criticize the government or to seize assets of companies that withdraw from the country, according to people familiar with the matter.
Prosecutors delivered the warnings in the past week to companies including Coca-Cola Co., McDonald's Corp., Procter & Gamble Co., International Business Machines Corp. and KFC owner Yum Brands Inc., the people said. The calls, letters and visits included threats to sue the companies and seize assets including trademarks, the people said.
JPMorgan Leads Talks to Contain Nickel Crisis Damage
Some of the world's biggest banks worked over the weekend to resolve a crisis in the nickel market that leaves them on the hook for billions of dollars owed by a Chinese metals giant.
JPMorgan Chase & Co., Standard Chartered PLC and BNP Paribas SA were among the banks and brokers seeking to reach an agreement with Tsingshan Holding Group, people familiar with the discussions said. Trades placed by the Chinese steel and nickel producer on the London Metal Exchange contributed to an uncontrollable rise in prices that led the exchange to halt trading and cancel eight hours' worth of transactions last Tuesday.
Hedge Funds' Commodity Bets Soar After Russia's Invasion of Ukraine
Hedge funds that placed bullish bets on commodities are notching sizable returns from the biggest rally in decades following Russia's invasion of Ukraine.
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03-14-22 0117ET
