Today’s podcast

https://soundcloud.com/user-291029717/ukraine-fears-creates-a-risk-off-sell-off?in=user-291029717/sets/the-morning-call

Overview: Ukraine fears creates a risk off sell off

• S&P 500 joins NASDAQ in 10%+ ‘correction’ – NASDAQ borders (-20%) bear market before pulling up
• US yield curve bull steepens in knee0jerk response to weaker equities
• PMIs reveal the service sector hit from Omicron – US much more so than Europe
• USD up but lacking rampant safe-haven bid; AUD down less than 1% on day
• AU Q4 CPI, NAB Business Survey, US Consumer Confidence, Microsoft earnings, German IFO

“Tell me why, I don’t like Mondays, I want to shoot, the whole day down.” – Boomtown Rats

Coming into the last ‘hour of power’ on Wall Street we are seeing a quite pronounced turnaround, after the S&P500 was at one point off 4% and the NASDAQ down 5%, the latter putting it within a whisker of ‘bear market’ territory, deemed to be a fall of more than 20% from high to low (-19.5%).  Bonds have inevitably attracted a safe-haven bid in the circumstances, as too the US dollar, notwithstanding that it is Fed policy considerations ahead of the FOMC’s two-day meeting that commences tonight that has been the proximate cause of the equity corrections, albeit now joined by geopolitical concerns (intensification of Russia/Ukraine tensions). Added to the mix either side of the weekend are doubts about the outlook for US corporate earnings based on the Q4 reporting season to date (most notably Netflix) plus a strong showing of US bipartisan support at the end of last week for significant regulatory actions against the US Big Tech. behemoths.

The week has go off to a rough start as far a risk assets are concerned, though the S&P 500 has with half an hour to go reduced its daily loss to 1.8% and the NASDAQ to just 0.9% – a recovery of more than 4% off the lows, for no obvious news reason but as is so often the way, what happens during the day can be reversed in the last hour or more as institutional/programme buying or selling dominates price action. The VIX was as high as 39 intra-day, but has since dropped back to around 33.

Russia/Ukraine has been front and centre of geopolitical concerns at the start of the week (though note too reports of an incursion by 39 military planes into Taiwan airspace).  NATO has put military forces on standby and is sending ships and jet fighters to its north-eastern and south-eastern member countries. UK intelligence has suggested that Russia was planning a “lightening war” that could take out Ukraine’s capital Kyiv. Russian President Putin meanwhile demands NATO pull its forces back.EU foreign ministers renewed their warning that they would impose “massive consequences” against Russia if it invades Ukraine, though the US has made clear that sanctions – the likely first line of retaliation against Russia – is something that would likely come only after, not before, some sort of incursion by Russian military forces.

Market wise, latest Russian/Ukraine developments has seen the gas price most relevant to the EU up 16% and to the UK some 19%, albeit still as much as 50% below their December 2021 peaks. In contrast, crude oil benchmarks are off +/- 2%, counterintuitive perhaps in so far as further disruption to gas supplies into Europe would see the main gas substitute in even stronger demand, but for now, seemingly more a reflection of a dent in the previously positive outlook for global oil demand and which had driven the run up in (WTI) crude from $75 to $85 up until late last week.

Economic data has not gone unnoticed overnight, in particular the various ‘flash’ PMIs, of which we got a foretaste during our time zone yesterday with Australia’s Services PMI plunging to 45.0 from 55.1 – Omicron-related, of course.  The US Service sector numbers have fared considerable worse than Europe (US 50.9 from 57.6, EU 51.2 from 52.0 and UK 53.3 from 53.6) while manufacturing activity, in Germany in particular, strengthened (60.5 from 57.4, signalling some easing in supply chain pressures) versus 55.0 from 55.7 in the US and 56.9 from 57.9 in the UK (also France not doing as well as Germany, little changed at 55.5 from 55.6)

Bond markets has seen a renewed bull steepening of the US yield curve, with the two-year note currently -5bp at 0.95% (the recent high was around 1.07%) while 10s are currently down 2bps on the day to 1.74%, and from a high of 1.9%. No one is seriously suggesting this signifies thinking about the ‘Fed put’ (refusal to lift rates because of equity market weakness) and we still have the best part of four quarter-point rate rises fully priced for this year. Rather, this looks to be largely a knee-jerk response to weaker equities, albeit perhaps one line doing the rounds at the weekend and earlier Monday, that the Fed might lift rates at every meeting in the early phase of tightening, looks to have taken something of a back seat.

In currencies, the RUB is predictably the weakest in EM (down just under 2%) while in G10, the DXY is up a 0.3% and JPY the best performing of the majors, albeit still a touch weaker (-0.1%) against the USD. AUD is currently off 0.7% at 0.7133, but the air beneath 0.71 (low of 0.7091) has so far proved to be very thin.

Coming up

• Q4 CPI. NAB is looking for another strong core inflation print, forecasting 0.8% q/q and 2.5% y/y for the Trimmed Mean measure (consensus 0.7%/2.4%). Anything above a 0.6% q/q for the Trimmed Mean would represent an upside surprise to the RBA’s November forecasts. This would mean the RBA would need to revise up their CPI forecasts and we think the Bank will be able to forecast core inflation being at the mid-point of the 2-3% band across their entire forecast horizon. Come the RBA’s February meeting on Tuesday, QE should be torched, while for the rates view much depends on the RBA’s willingness to tolerate inflation at or above target as it waits until wages growth is closer to 3% plus. As for the headline, we pencil in 1.2% q/q and 3.4% y/y (consensus 1.0/3.1%).
• The NAB Business Survey for December is out on Tuesday and will pick up the impact of the Omicron wave, which kicked in in mid-December and looks to have reached a peak last week.
• Microsoft and Johnson & Johnson are the two biggest household names reporting earnings tonight data wise, on the first day of the two-day FOMC meeting, includes the Conference Board’s Consumer Confidence measure, with an Omicron-impacted fall to 111.8 from 115.8 expected.
• Germany has its January IFO survey. Business Climate seen 94.5 down from 94.7, with the Current Assessment expected down slightly but Expectations up small.

Market prices

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