HomeContributorsFundamental AnalysisSanctions – Actions Speak Louder than Words as RUB Rallies

Sanctions – Actions Speak Louder than Words as RUB Rallies

Market movers today

Market continues to focus on the developments in Ukraine. Russian parliament’s upper house authorized President Putin to deploy armed forces abroad yesterday, and as Putin noted that the region which Russia considers independent is not limited to the areas controlled by the separatists, near-term uncertainty remains high.

Aside from the geopolitics, it is a quiet day in terms of economic data, final Euro Area inflation figures for January are due for release. From central banks, ECB’s de Guindos and Fed’s Daly will be on the wires.

The 60 second overview

Russian sanctions: All bark? As the situation escalated in Ukraine over the week (see more in Research Russia – Hope dies last – Nervous markets are far from pricing in a full-blown war, 22 February), the market has naturally turned its short-term attention to the specifics of sanctions. Yesterday, Biden announced a focus on 1) a select few Russian banks and 2) Russian foreign-debt financing. Meanwhile, Germany is naturally saying that certification of the NS2 will be on pause for the time being and EU will be sanctioning Russian politicians. To markets, this is a step back from the previously started intentions of starting at the top of the escalation ladder and USD/RUB has dropped from nearly 81.00 at highs to 78.65, and Russian equities are up some 10% from yesterday’s lows. This naturally also reflects that at present levels in the currency positioning is quite neutral and the credit premium is substantial – although it can of couse always be repriced further.

Flight to safety move: Yesterday was a very volatile trading session starting with an initial risk-off on the geopolitical tensions with bunds touching 5bp lower in a flight to safety move. However markets quickly reversed with Bunds touching 13bp higher during the afternoon compared to the morning lows. On the day, Bunds ended 3bp higher. Front end Germany saw the biggest underperformance on sources stories that the Deutsche Finanzagentur had started to provide additional bonds to the market, which left Schatz 6bp higher on the day. The source story accelerated the trend of higher rates around lunch time. Official communication is still pending though. The fact that sources stories have floated the markets, suggest that the repo squeeze we have observed in the past weeks have made it to the attention of policy makers, however it is yet to be seen how quickly they will eventually react to it.

RBNZ hikes 25bp. Reserve Bank of New Zealand hiked interest rates by 25bp overnight, but signaled that more aggressive tightening may be needed. In terms of balance sheet, RBNZ will begin ‘active QT’ and it plans to sell bonds from its portfolio in addition to not reinvesting maturing investments. Economic risks have faded since the previous meeting in November, and while RBNZ decided against a 50bp this time, they clearly signaled that it could come at a later stage, and also lifted the endpoint of the rate path. NZD/USD rose overnight and while the geopolitical tensions’ impact on commodities remains the key driver for NZD in the near-term, markets have not discounted much more than 25bp per meeting going forward, leaving further upside potential for NZD.

Equities: Equities mostly lower on Tuesday with geopolitics setting the scene. US gradually transformed to a risk-off session, with all sectors lower and cyclicals underperforming. Real estate and health care fared the best (also helped by yields moving lower) and consumer discretionary at the bottom. Interestingly, energy companies were among the worst performers as well. Presumably, as investors are not overly worried about the future of Russian energy exports. Still, VIX ticked higher and is now just south of 30. S&P -1%, Dow -1.4%, Nasdaq -1.2% and Russell 2000 -1.5%.

FI: Yesterday was a very volatile trading session starting with an initial risk–off on the geopolitical tensions with bunds touching 5bp lower in a flight to safety move.

FX: The correlation to non-RUB assets has shot up, EUR/USD including, as news flow has indeed escalated. Sanctions appear to not be starting at the top of the escalation ladder, as otherwise communicated as an option.

Credit: While CDS indices stabilized yesterday, cash bonds continued to sell off. iTraxx Xover tightened 2.3bp and Main 0.8bp. HY bonds, on the other hand, widened 6bp and IG 5bp.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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