February 23, 2022

Markets Today: Biden’s sanctions first step against Putin’s ‘invasion’

Restrained market reactions so far (bar oil) to Russia-Ukraine developments…

Todays podcast

Overview Caught a Lite Sneeze

  • Restrained market reactions so far (bar oil) to Russia-Ukraine developments…
  • …even though the White House used the “I” (invasion) word for the first time
  • Sanctions (so far) fall short of the highest curbs available
  • In the meantime, US and German data positively surprise
  • AUD holding above 0.72, NZD above 0.67 in front of RBNZ (+25bps expected)
  • AU Q4 WPI today seen at 0.7% q/q, 2.4% y/y up from 2.2%

Caught a lite sneeze caught a lite breeze, Caught a lightweight lightningseed – Tori Amos


News in the last couple of hours that Russian President Putin’s ‘peacekeeping’ mission in Donetsk and Luhansk extends to the whole of the region not just their respective capital cities was responsible for the fresh turn for the worse in US equities, where losses roughly doubling from where they were prior to the announcement from Moscow. With an hour of NYSE trade to go, some of these losses have been reversed, with President Biden’s announcement of a fist round of sanctions against Russia evidently not striking any fresh fear into risk markets. Currency and rates market are still showing relatively retained, some might argue even perverse, reactions to latest geopolitical developments, perhaps because sanctions announced so far fall short of the toughest available pending a deeper incursion by Russian forces into Ukraine. Oil prices are much stronger though, Brent crude hitting a high of $99.50, its highest since September 2014. Commodity currencies including AUD appear to be drawing some support from the current, and potential, impact on commodity prices from sanctions on Russia, overriding (for now) the usually dominant influence of risk sentiment in circumstances such as these.

The White House has been out earlier Tuesday describing Russian troop movements in the region of east Ukraine an ‘invasion’, a term officials had until now refrained from using. This was before Moscow’s announcements that it has designs on the whole of the Luhansk and Donetsk regions not just the areas around the capital cities already controlled by Russian separatists (the difference being a combined population of some 3.6 million people against 1.3 million just in the two cities). And listening to a geopolitical expert at Canberra’s  ANU last might, he was noting that Ukraine’s capital, Kyiv, is a mere 80km from the Belarus border, a distance he described as a ‘morning’ stroll for Russian T90 tanks. That may now be the more important news to watch.

Among the retaliatory actions from western official so far, Germany’s chancellor Olaf Scholz has announced the suspension of the certification process for the NordStream 2 gas pipeline , to which Russian Medvedev (the deputy chair of the security council, not the tennis player) has responded saying ‘welcome to the new world where Europeans will pay EUR2,000 for gas’ (note this refers to the price per 1,000 cubic meters, the equivalent of EUR172.50 per MwH – levels already en briefly last December. So far Tuesday, the TFF Netherlands benchmark price has jumped from EUR72 to about 80).

As well as sanctions against some Russian banks announce by the EU yesterday, President Biden is speaking as I type, saying ‘this is the beginning of the Russian invasion’ and that he is imposing sanctions, including (immediately) on Russian debt and to Russian banks, designed to cut the country off from accessing debt finance. More to come, he suggests, subject to further escalation by Moscow. .

While the market focus will remain locked onto Russia-Ukraine development, incoming economic and central bank news is not being completely overlooked, which makes sense given that risk market have not gone into absolute freefall-fall as they did back in the early stages of the covid pandemic and, as of now, don’t appear to have consequences for what central banks may or may not be planning to do in coming months (far from it to the extent that commodity price impacts from Russian Ukraine developments can only adding to inflation pressures).

Here it has been mostly positive news. Germany’s IFO survey exceeded expectations, with the headline index rising to 98.9 from 96.0 well above the 96.5 expected (an outcome hinted at by yesterday’s German PMI data).  The US Markit PMIs also exceeded expectations, at 57.5 for manufacturing up from 55.5 and 56.0 expected, and Services at 99.2 from 96.2 (versus a fall to 95.8 expected). And the US Conference Board’s Consumer Confidence measure for February has once again failed to reflect the chronic weakness evident in the earlier University of Michigan releases. It slipped, but only to 10.0 from a (downward revised0 111.1 in January).

60 minutes ahead of the NYSE close, and US equities are mixed relative to where they say prior to announcement of initial sanctions from President Biden and Russia’s avowed interest in the whole of the Donbass region of Ukraine, the S&P 500 off about 1.5% and the NASDAQ a lesser 0.7%. Earlier the Eurostoxx 50 finished virtually unchanged, a remarkably restrained reaction to the day’s events.

In bonds, confidence that Ukraine’s developments will have no deterrent effect on Fed thinking is reflected in 2-year yields up 6.6bps while limited equity market loss sees 10s +2bpos to 1.95%.  10-yar Bunds ended their day 3.6bps higher at 24bps, still shy of the 30bps mid-February high.

Currencies are very much more consistent with ‘risk-on’ than ‘risk-off markets, NOK understandably at the top of the G10 pile given the oil price so close t[aching $100, but the risk-sensitive SEK is also doing very well NOK +1.5% and SEK +1.3%). We might question why NZD (+0.6%) has done better than AUD (0.5%) given the relativities in respective terms of trade from the latest jump in oil (and hence gas, cola) prices, but yet is  question to ponder in more detail post today’s RBNZ decision and Ausrlain wags data. The USd is overall not much changed , currently -0.075 on the day, with the ‘safe haven’ JPY and CHF the two weakest G10 currencies at -0.3% and -0.5% respectively. Not what many of us would have suspected 24 hours ago.

Coming Up

  • RBNZ OCR decision and MPS (12:00 AEDT). BNZ expects a 25-basis point OCR hike, but would not be surprised by a 50 basis point increase. Details on how the RBNZ will reduce its balance sheet is expected.
  • AU Q4 WPI. NAB expects wages to have accelerated in Q4, rising 0.7% q/q and 2.4% y/y up from 2.2% in q3 (also the consensus). We expect private sector wages growth to have accelerated to 2.5% y/y, a rise likely to have bene supported by the delayed effect of some award wage increase9from s that usually take effect in Q3. Also Q4 Construction Work Done, the first of the GDP partial indicators (consensus 2.5%)
  • Offshore, BoE Governor Bailey and some of his MPC team (Broadbent, Haskel, Tenreyro) are testifying (from 9:30 UK time).  Eurozone final CPI (preliminary 5.1%) and ECB’s Guindos and de Cos are speaking. Nothing of note in the US.

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