Market movers today
Market continues to focus on the Russia-Ukraine situation after Putin yesterday formally recognized the two separatist regions in Eastern Ukraine, Donetsk and Luhansk, as independent. Kremlin ordered troops to move into the area, while Biden announced that US will impose economic sanctions on the separatist regions. Further clarity on the West’s response, Russia’s next steps as well as the Blinken-Lavrov meeting scheduled for Thursday remain key focus points.
While the geopolitics are clearly the most important market driver for now, US February Markit Flash PMIs will be released in the afternoon, and consensus looks for an uptick in the services sector following EA figures yesterday. Central Bank of Hungary will have a meeting today followed by Reserve Bank of New Zealand overnight, we expect 25bp hikes from both.
The 60 second overview
Russia. President Putin has recognised the two break-away regions (Donetsk and Luhansk) – something the West has previously said would be a deal-breaker for further talks. Diplomatic stalemate between Russia and the West remains. Military escalation has already started in Eastern Ukraine and, according to US intelligence, Russia has the readiness for an imminent large-scale attack on Ukraine. Considering military escalation in Eastern Ukraine has started, markets remain surprisingly calm with negative reactions thus far contained to RUB-linked assets. Yesterday marked one of the first days where we saw notable contagion to global assets from the escalating situation. See more in Research Russia – Hope dies last – Nervous markets are far from pricing in a full-blown war, 22 February.
Brent hits cycle high: Brent reached a new cycle high yesterday as Russia-Ukraine geopolitical tensions grew further. The market puts a premium on oil due to the risk that Russian oil exports will be hit by sanctions. However, oil is also following the broad ‘super cycle’ like trend higher in commodity prices, which owes to strong global demand. Hence, even if the tensions should deescalate, oil prices will not necessarily drop much.
Spreads widen further in Europe and elsewhere: Risk sentiment was sour yesterday, despite the surprising strong preliminary PMIs from Germany and France in the morning. Bunds ended broadly unchanged on the day albeit with a choppy session amid US cash markets closed for Presidents Day. Spread widening was recorded across the board for the 5y+ area. BTPs-Bund spreads widened 7bp to 171bp. In light of the rising tensions and Putin recognizing the two separatist regions in Eastern Ukraine, Donetsk and Luhansk, as independent and with Kremlin ordering troops to move into the area, we expect a continuation of the sour risk sentiment today.
Equities: The week kicked off on an anxious note. This anxiety will be even more enhanced in today’s session as Russia has ordered troops into Eastern Ukraine. US futures are tumbling 1-2% this morning, oil prices are surging (Brent USD 97/bl) and RUB hitting a new year-to-date low. US markets were closed for holiday on Monday, but Europe took height for the increased tension and resumed the gloomy sentiment from last week. Stoxx 600 lost another -1.3% in a risk off session (all sectors lower) on Monday led by growth cyclicals. Materials, health care and consumer staples the relative winners, tech and cars relative losers.
FI: Spread widening was recorded across the board for the 5y+ area. BTPs-Bund spreads widened 7bp to 171bp.
FX: NOK continues to trade on a weak footing. EUR is hit by rising energy prices and rising risk aversion as geopolitics escalate.
Credit: The downbeat risk sentiment yesterday also affected credit markets, with iTraxx Xover closing almost 7bp wider and Main 1.1bp wider. HY bonds widened 4bp and IG 3bp.
