The euro fell versus the dollar as flows into safe-havens rise amid the Ukraine-Russia conflict and as the market scales back expectations for interest-rate rises by the European Central Bank, Commerzbank said.
Although expectations for U.S. interest-rate rises have also been pared back, the Fed is still likely to raise rates in March and continue to do so despite the Ukraine crisis, Commerzbank's Antje Praefcke said in a note.
The ECB might hesitate longer before lifting rates even though inflation will accelerate due to rising energy prices, she said.
"Rising inflation which is not counterbalanced with rate hikes plus the risk of weaker growth: that would definitely be a negative constellation for the euro."
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The ruble dropped 11.6% Thursday against the greenback to 116 rubles to the dollar, according to FactSet. Traders say investors' and brokers' unwillingness to touch the currency has limited the ease with which they can trade it.
Currencies of nearby countries have fallen against the dollar as well, as investors worry about economic spillover. The Polish zloty fell 0.8% Thursday, and the Hungarian forint declined 0.7%.
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The Swedish krona doesn't stand a chance against the Norwegian krone amid widespread risk aversion over Russia's invasion of Ukraine, Commerzbank said.
The two currencies usually suffer to a similar extent during risk-off periods but the Norwegian currency is standing up well compared to its Swedish peer as energy prices rise in reaction to the Russia-Ukraine conflict, Commerzbank currency analyst Antje Praefcke said in a note.
"Increased energy prices lead to increased Norwegian revenue," she said.
The Swedish krona, however, is affected by high market uncertainty, she said. The Riksbank's loose policy stance had already put pressure on the SEK before the Ukraine crisis, she said.
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The negative implications of Brexit for the U.K. and the market having already priced in aggressive interest rate rises by the Bank of England warrant caution over sterling's outlook, Amundi said.
"We think the GBP has risen sufficiently vs the CHF and we are no longer optimistic on sterling, given that the highly aggressive sequence of hikes from the BOE is already priced in by the market," the asset manager's analysts said.
Amundi maintains a "cautious view" on EUR/GBP as the U.K. will remain "geopolitically isolated in the post-Brexit world versus the U.S. and EU, " they said. Amundi expects EUR/GBP to rise to 0.84 in the second quarter from 0.8285 currently.
Bonds:
In bond markets, the yield on the benchmark 10-year Treasury note ticked up to 1.870% from 1.862% Wednesday.
Amundi is cautious on U.S., core and semicore duration due to upward pressure on bond yields, but it remains agile amid new dynamics related to inflation and policy issues, it said.
In the current geopolitical environment, U.S. and core European government bonds provide safeguards to portfolios, it said.
Amundi expects income opportunities in Chinese government and euro peripheral debt, considering Italian BTPs as ones offering attractive relative value opportunities versus German debt, given Italy's political stability, economic growth potential, and the ECB's aim to avoid fragmentation in the eurozone.
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A sustained rally in developed market government bonds is unlikely, unless the war in Ukraine causes a sharp fall in output in major developed markets, Capital Economics said.
The war has caused a rally in long-dated government bonds, pushing their yields lower, although bond yields show signs of tentative stabilization Thursday morning.
"At risk of stating the obvious, the moves in bond yields from here will depend crucially on how the war, sanctions and the general level of stress in financial markets evolve, which is highly uncertain," CE said.
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The capital controls that Russian authorities have imposed in response to international sanctions raise significant questions about the Russian state's willingness to service its debt owed to foreign residents, Scope Ratings said.
"These measures indicate elevated risk and uncertainty as regards to policy predictability of Russia," it said.
The measures will hold further adverse implications for financial stability, making Russia more vulnerable to banking and liquidity crises, as well as significantly raising the risk of further negative credit rating actions for the Russian sovereign near term, the ratings firm said.
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Uncertainty surrounding central banks' monetary policy action in the wake of war in Ukraine warrants caution in credit markets, said Amundi Asset Management Institute.
"We acknowledge the need for additional caution in credit, with an increased focus on selection," the asset manager says, adding that investors should tactically look towards government bonds for protection against bonds' sensibility to changes in interest rates.
Apart from higher interest rates, "quantitative-tightening could cause a weakening of sentiment in credit through a drain in liquidity/volatility, even as corporate fundamentals are strong," the asset manager said.
Commodities:
Oil continued its rally, closing in on the $120 a barrel level, as the market fears extreme tightness if the Ukraine crisis shuts Russian crude out for good.
Sanctions on Russia have made oil traders unwilling to deal with Russian crude, effectively removing it from the market, at a time when markets are already extremely tight.
Brent could rise as high as $145 a barrel, TD Securities said. "Additional upside is still very much in the cards, as the market does not see much replacement supply for Russian product in the near-term," it said.
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European natural-gas prices rose 8%, adding to a surge this week. Investors are worried that supply of natural gas could be disrupted to Europe as a result of the war. About a third of Russian gas exports to Europe flow through Ukraine, according to analysts.
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There could soon be supply disruptions for metals, such as aluminum and nickel, ANZ said, noting that shipping giant Maersk, which handles shipments for Russian aluminum producer United Co. Rusal, recently suspended operations in Russia.
Large volumes of aluminum and nickel regularly flow from St. Petersburg to other European ports and are at risk of disruption, ANZ said.
Russia produces 17% of the world's supply of LME-grade nickel, sought after by the electric-vehicle battery sector, so the scale of a potential supply disruption could be large, ANZ noted.
The three-month LME contract for aluminum rose 2.1% to $3,642.0 a ton and the three-month nickel contract gained 4.1% to $26,935.0 a ton.
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Gold edged higher in early Asia trade, buoyed by safe-haven demand.
The precious metal will remain very sensitive to news on the Russia-Ukraine war and should undergo a strong move higher as geopolitical tensions and growth concerns won't be going away anytime soon, Oanda said.
Demand for safe havens will probably remain elevated as the war is only in its early stages, Oanda said.
EMEA HEADLINES
Companies Divesting From Russia Are Facing Big Write-Downs
Companies that divest from their Russian holdings will have to book hefty write-downs and face complex accounting judgments, experts say.
Businesses including BP PLC, Shell PLC and Apple Inc. have begun cutting ties with Russia as it continues its attacks on Ukraine. On Sunday, BP said it plans to exit its roughly 20% stake in oil company Rosneft Oil Co., followed by Shell a day later saying it would pull back from its joint ventures with Gazprom PJSC and end its financing of the Nord Stream 2 natural gas pipeline project.
Russia Batters Ukraine's No. 2 City Kharkiv, as Kyiv Offensive Stalls
KYIV, Ukraine-Russian forces pounded Kharkiv, Ukraine's second-largest city, with airstrikes in a bid to break the will of the country's resistance as Moscow's offensive toward Kyiv stalled amid fierce Ukrainian counterattacks and logistics mishaps.
Russian missile debris fell near Kyiv's central train station on Wednesday night, damaging a major heating pipeline, with the blast wave breaking the station's windows. Thousands of civilians, particularly women and children, are sheltering in the station at night as they await evacuation trains to western Ukraine. Ukrainian officials said the missile was shot down by Kyiv's air defenses.
Eurozone Growth Rebounded in February Ahead of Ukraine's Invasion, PMIs Show
Eurozone economic growth regained momentum in February to reach its strongest pace since last September, according to the latest purchasing managers index by IHS Markit.
After slumping in January to an 11-month low, the eurozone composite PMI rose to 55.5 in February from 52.3 in the previous month.
Lufthansa Expects Strong Traffic Recovery This Year After 4Q Losses Narrowed
Deutsche Lufthansa AG said Thursday that it expects air travel to improve this year after narrowing its earnings losses in its fourth quarter.
"We are very certain that air traffic will experience a strong upswing this year," Lufthansa's Chief Executive Carsten Spohr said. The German group expects average capacity to be above 70% of 2019 levels in 2022, and said bookings for the coming Easter and summer vacations almost reached pre-pandemic levels.
Telecom Italia Swung to 4Q Loss on Impairment, Write-Off; Sets 2022-24 Targets
Telecom Italia SpA swung to a loss in the fourth quarter of 2021 as it booked an impairment of domestic goodwill and a write-off. It said it approved an industrial plan until 2024 which includes the separation of mobile and enterprise services, and set targets for the period.
TIM posted a loss of 8.64 billion euros ($9.61 billion) for the last quarter of the year compared with a profit of EUR6.05 billion for the same quarter of 2020. TIM said late Wednesday that the loss was attributable to an impairment of domestic goodwill for EUR4.1 billion and the writing off of deferred tax assets for EUR3.8 billion.
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03-03-22 0640ET
