Good mood didn’t last long as the US didn’t let the tensions de-escalate insisting that Russia is certainly not pulling back its troops but is rather increasing its presence at the Ukrainian border. The US warning hit the investor appetite at yesterday’s session and reversed the earlier week gains in stock indices.
As a result, the safe have flows boosted gold, again. The price of an ounce is back above the $1875 mark, as crude oil is steady around the $92 per barrel. If the US doesn’t let the situation de-escalate, we could see gold hitting $1900 in the coming sessions, but the gains remain vulnerable to any relief at the Ukrainian border. And ‘no war’ is the base case scenario.
US and European futures hint at a negative start on Thursday.
Not even scared
The US equities followed up with a soft European session, but the S&P500 erased a part of losses at a late-session rally after the release of the Federal Reserve (Fed) minutes. Even though the FOMC minutes were as hawkish as expected, there was no surprise for investors who already knew that inflation is a serious problem in the US, and requires a steeper rate normalization policy and a potentially aggressive unwind of the Fed’s portfolio holdings.
Interestingly, the pricing on the fed funds front flipped to give more chance for a 25bp hike in March, instead of a 50-bp hike. According to the activity on the US sovereign bonds, the probability of a 25-bp hike went from near 40% to above 60% yesterday. But the latest rise in the US sovereigns demand is perhaps, at least partly, due to the geopolitical tensions, and may not explain the full picture regarding the Fed expectations. Therefore, the easing US yields were certainly explained by looming war risks, and not the Fed doves.
In the FX markets, the US dollar remains strong as the US dollar index is approaching the 96 mark, while the pound-dollar is eking out gains above the 1.35 mark as the high inflation in the UK keeps the Bank of England (BoE) hawks in charge of the market. The latest figures showed that the consumer prices in Britain rose by 5.5% in January, and more worryingly, the inflation expectations soared, hinting that inflation in the UK could hit 8% by April due to the rising energy costs and the tax hikes. Skyrocketing energy prices will certainly on the economic recovery, but perhaps not on the FTSE 100 which benefits from both the energy-driven inflation, and the prospects of rising interest rates.
