Market movers today
All eyes are on the Russian invasion of Ukraine and on the implementation and announcements of sanctions from both the West and Russia. Markets will be characterised by heightened volatility, large sensitivity to headlines and low intraday transparency on news and rumours out of Ukraine.
Economic data releases will matter little in the coming sessions even if Wednesday’s Eurozone inflation print and Friday’s nonfarm payrolls report have the potential to shake up markets. Also, we are likely to hear OPEC comments on oil prices going into Wednesday’s OPEC+ meeting.
The 60 second overview
Continued Russian aggression in Ukraine: fighting continues on multiple fronts in Ukraine. According to local authorities Ukraine has regained control in Kharkiv and continues to defend the capital of Kyiv. Western intelligence indicate that Russia so far has only committed roughly half of its available firepower to the invasion. The West has stepped up their military support to Ukraine and as a response Russia has put their nuclear defences on alert. Ukraine and Russia leaders have agreed to meet at the Belarus border on Monday but the exact time of the meeting has not been confirmed. Many Western countries advise their citizens to leave Russia.
The West escalates sanctions: The US, EU, UK and Canada announced a fresh round of sanctions against Russia over the weekend. Following earlier announcements of sanctions targeting Russian individuals and key Russian financial institutions, the West has now communicated a coordinated set of significantly tougher sanctions including an exclusion of certain Russian financial institutions from SWIFT, the freezing of Russian central banks (CBR) assets in their jurisdictions, an expansion of the list of Russian individuals whose assets abroad will also be frozen and sharp limits on the sale of “golden passports” to Russian citizens. Also the EU has banned all state-owned media companies and has closed the European airspace to all Russian aircraft.
The EU has also said it plans to impose sanctions on Belarus that has acted as an aid to Russia during its aggressions. Few hours after the announcement a referendum in Belarus allowed for nuclear weapons being deployed in the country thereby ditching its non nuclear-status.
Markets: Friday’s session was characterised by a relief rally amid the toughest sanctions not getting implemented. This morning this reverses as markets react negatively to the renewed escalation with the big equity futures in red (-2-5%), yields moving lower, USD gaining, RUB coming under severe pressure and commodity prices rising. Brent crude has risen USD 5/bbl while we have yet to see the impact on European natural gas prices. Also there are signs of funding stress in the USD market – amid fear of missed payments and overdrafts – with FRA/OIS spreads widening the most since March 2020.
Hit to RUB: RUB has come under immense pressure with much uncertainty as to where the market is be quoted. In offshore trading RUB has fallen as much as 30% vs the USD while the drop in onshore trading has been more modest (~6%). The freezing of CBR’s assets is an unprecedented move at this scale given the size of the CBR’s balance sheet. Freezing central banks assets will largely cut off the CBR from access to its EUR and USD reserves, which in total comprise app. 50% of its total foreign reserves (16% in USD and 32% in EUR). While some of the CBR’s EUR and USD denominated assets are held outside the respective jurisdictions, the decision is likely to paralyze the CBR’s capacity to use its foreign reserves for outright FX interventions. Also several large entities such as the Norwegian Government Pension Fund Global (the oil fund) and BP have reported significant divestment plans out of Russia during the weekend.
Media reports of long lines of people in Russia for ATMs. This morning Russia reacted by “temporarily prohibiting” foreigners from selling Russian securities.
Germany: Germany is making a massive turnaround on the political scene after Chancellor Scholz gave a historical speech yesterday reversing the past many years of SPD policies, as well as Germany defence politics. In the speech Germany will now almost double the defence budget by EUR100bn this year via the creating of special fund, and further will allow weapon export via Netherlands to Ukraine. That means Germany will now spend more than 2% of GDP on defence living up to its NATO commitment. Furthermore Scholz declared an end to the energy dependence where amongst other two new terminals for LNG and green energy is set to be created. The renewed focus on the defence and its increased spending, may open for a larger political discussion later this year on this should be treated at the upcoming budget and deficit rules review this year. We do not rule out a different treatment to military spending given the geopolitical situation as well as green and digitalisation.
What to follow from here: Naturally the ongoing fighting should be followed closely although one should be aware of low intraday transparency, rumours and propaganda from both sides. Details on the implementation of sanction and counter sanctions should also be followed closely as well as whether China will condemn Russia’s aggression. Given Switzerland’s large share of Russian payment flows there will also be focus on Swiss politicians and how/if they will implement EU/UK/US/Canada sanctions. We will also follow developments in Russia closely including the risk of bank run and demonstrations.
FI: Friday’s price action was relatively benign with Bunds ending 5bp higher on the day, and tighter spreads to Bunds across the board, with Finland -2bp and Italy -3bp, as the sanctions announced at that stage were relatively mild. However, we are in for a volatile session today with Bund yields lower and wider spreads. In Lagarde’s speech on Friday she said they are ready to take the necessary action to ensure price and financial stability without sending particular new policy signals. Ahead of next week’s ECB meeting, we could see liquidity operations and/ or swap lines in case of need. The HICP inflation print on Wednesday is a particular important release ahead of next week’s ECB meeting for the overall calibration of instruments.
FX: RUB collapsed overnight with USD/RUB moving more than 30% higher to 107.5 at the time of writing. Broad USD strengthened with EUR/USD falling 1% to now below 1.115. Safe haven currencies like CHF and JPY rose overnight, while SEK and NOK sold off. EUR/SEK is approaching 10.70, while EUR/NOK moved above 10.00. The Russia-Ukraine war and sanctions will dominate FX space today.
