March 8, 2022

Markets Today: Day 12 brought more volatility, the search for safety

Germany rejects proposed US, EU embargo on Russian oil imports

Todays podcast

Overview Soldier of Love

  • Germany rejects proposed US, EU embargo on Russian oil imports
  • Oil down on Monday morning highs, commodity currencies slip back…
  • …but Nickel +90%, boosting the LMEX index another ~3.5%
  • Kremlin offers Ukraine conditions for ceasing military operations…
  • …to which equities respond positively…
  • …but German Dax, Eurostoxx 50 both enter bear market territory (-20%)
  • NAB Business Survey this morning

Lay down your arms, And surrender to me, Oh, lay down your arms, And love me peacefully, Yeah –  Pearl Jam

Though back from intra-day extremes, the week has begun much as the old week ended, with stocks under pressure, the USD in the ascendancy, commodity prices still on a tear and, in rates markets, yield curves continuing to flatten as markets increasingly price recession risk alongside ongoing confidence that central banks who were committed to lifting rates before the war started, will still proceed to do so amid ever-higher inflation prints. Reports of an offer from Russia to Ukraine to cease military activity comes with a raft of conditions doubtless unacceptable to Ukraine, though looks to have had a hand in bringing European stocks up off their early-day lows. The Dax and Eurostoxx 50 nevertheless both closed in (-20%) bear market territory.

While oil prices have been front and centre of global markets across all asset classes of late, nickel prices have stolen the limelight overnight, up by as much as 90% on Friday’s close . Russia produces 7% of the world’s supply of this key stainless steel and lithium-ion battery ingredient. Explanations for the scale of the move are best left to our commodities experts who understand the intricacies of the commodities trading houses and activities of producers but is being described as the result of ‘sellers rushing to the sidelines, leading to sharp price jumps between trades as short position holders scrambled to buy back positions’ (aggravated by speculative buying on the Shanghai Futures exchange  – this according to Bloomberg)

As for oil, where prices jumped to almost $140 at the APAC open on Monday on the weekend reports that the Biden administration was looking seriously at banning Russian oil exports, German chancellor Olaf Scholz overnight has rejected a proposed European embargo ,  preferring to focus on “sustainable” pressure on Moscow that would not impose too heavy a burden on Germans (FT reports).  “All our steps are designed to hit Russia hard, and be sustainable over the long term,” Scholz said in a statement on Monday. “At the moment, Europe’s supply of energy for heat generation, mobility, power supply and industry cannot be secured in any other way. It is therefore of essential importance for the provision of public services and the daily lives of our citizens.”

Separately, Bloomberg reports sight of a draft EU statement saying that “The (EU) leaders may agree to phase out the EU dependence on Russian gas, oil and coal imports, mainly by diversifying supply sources, building up renewables and improving the interconnections in gas and power markets, according to the statement. Scaling up energy efficiency and improving contingency planning would also help wean off Russian fossil fuel imports.”  And in the last couple of hours, headlines have hit saying ‘EU aims to cut dependence on Russian gas by almost 80% in 2022’. That sounds like a very big call, in the absence of some form of rationing.  As a reminder, Germany is currently dependent on Russia for imports of more than 55 per cent of its gas, half of its coal and 35 per cent of its oil.

Oil is currently up by between $3.50 (WTI) and $5 (Brent) in a highly volatile market but being at least $10 back from yesterday’s early morning highs has taken a little bit of the wind out of the sails of commodity/pro cyclical currencies, a little more so in AUD (-0.6% to  low of 0.7312 after hitting 0.7440 yesterday morning) than NZD or CAD (both -0.5%). The appearance of ‘overbought’ technical conditions (e.g. Relative Strength Indices) is also worth  mentioning in relation to the slippage

EUR/USD remains friendless if actually the last-weak G10 currency on Monday (-0.4%) with GBP faring worse (-0.8%) so partially reversing the recent pronounced downtrend in the EUR/GBP cross. Also to note is that the EUR/CHF cross fell below parity yesterday for the first time still the SNB’s decision to abandon the hitherto 1.20 floor on the EUR/CHF cross. The tick charts suggest the SNB did have something to say about that and might be a reason EUR/USD has not fared a badly as it otherwise might have. The Russian Rouble, meanwhile, as thinly traded as it inevitably is at present, at one point Monday was almost RUB180 to the USD versus RUB123 at the end of last week, but currently back near 140, which still represents a near halving of its value since prior to the Invasion of Ukraine.

Global equity markets remain in a world of pain , the S&P500 and NASDAQ both showing losses of more than 2% an hour ahead of the close.  Earlier the Eurostoxx 50 finished down ‘only’ 1.2% having ben some 4% down earlier in the session. The German Dax ended -2% having been more than 5% down early on. The pull-up hasn’t though spared either index ending more than 20% down from their prior cycle (or year to date) highs, so officially in bear market territory. In comparison, the S&P500 is down 11% year-to-date.

Reportedly helpful to the intra-day reversal was a Reuters report that Russia has told Ukraine it is ready to halt military operations “in a moment” if Kyiv meets a list of conditions , according to a Kremlin spokesman.  Dmitry Peskov said Moscow was demanding that Ukraine cease military action, change its constitution to enshrine neutrality, acknowledge Crimea as Russian territory, and recognise the separatist republics of Donetsk and Lugansk as independent states. It was the most explicit Russian statement so far of the terms it wants to impose on Ukraine to halt what it calls its “special military operation”, now in its 12th day.  Doubtless completely unacceptable to Ukraine of course, and Reuters report no immediate reaction from the Ukrainian side, saying only that Ukraine is to continue talks with Russia and that there have been ‘small positives’ with respect to humanitarian issues.

In bonds, the safe haven support for the longer end of the US Treasury market of late has been checked, at least overnight, by still-h igher inflation expectations, with 10-year break-even inflation rates reaching record highs in the US (2.78%) and Germany (2.63%). 10-year Treasuries are currently +2bs on the day at 1.75%, though this hasn’t stood in the way of further curve flattening, with the 2-year Note yield up almost 7bps at 1.54%.

Coming Up

  • Light calendar today. The NAB Business Survey is the main economic event during our time zone. The January survey showed a deterioration in conditions to a little below their long run average alongside disruptions related to the high Omicron caseload, but the forward looking confidence measure rebounded back into positive territory after the initial outbreak caused a sharp fall in confidence in December. The survey also provides monthly readings on input costs and retail prices, which are both very topical at the present time. Weekly Oz consumer confidence and Japan Balance of payments figures are also due.
  • Offshore, the main economic data points are the US NFIB Small Business Optimism survey (expected 97.4 from 97.1 in January) and the January US merchandise trade balance, expected to have blown out to a record deficit of $87.3bn, based on last week’s (record) Advance goods trade deficit of $107.6bn

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