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Markets

The war in Ukraine yesterday again triggered an outright risk-off session. The uncertainty on how far the conflict will go is evidently the first concern. However, from an economic point of view, markets fear a new wave of long-lasting supply chain issues, in sectors like energy and agricultural commodities. Western firms breaking the links with subsidiaries in Russia will also come at cost.

The impact both on growth and on inflation are almost impossible to assess as of yet. Even so, markets are ‘gradually’ captured by some kind of stagflationary fear. A persistent rise in oil and (agricultural) commodities is an obvious visualization of rising costs of the conflict. Oil this morning, jumped north of $110 p/b!! European equities yesterday lost up to 4.0%! US indices lost 1.55% (S&P) to 1.76% (Dow).

Bond markets clearly were occupied with safe have considerations and the negative impact on growth. US yields declined between 12.3 bps (5-y) and 5.6 bps (30-y). As was the case on Monday, the decline was solely due to a collapse in real yields (10-y -17 bps !!!). Inflation expectations rose modestly (7.5 bps). Moves in the European/German market were even more hefty. German yields declined 24.5 bps for the 5-y, 20.5/7 for the 10/2-y sector and ‘only’ 16.5 bps for the 30-y. T

The market clearly concluded that there is a big chance for the ECB to delay/or at least take a wait-and-see approach when communicating at next week’s policy meeting. The market currently sees only limited room for the ECB to frontload policy tightening. A positive deposit rate/policy rate end 2022 now looks quite far away even as inflationary pressures are rising sharply (again upward surprises in Italy 6.2% Y/Y and Germany 5.5% Y/Y). For now we don’t draw any firm conclusions. The US Manufacturing ISM remains solid (58.6 from 57.6), but evidently this was of little importance for trading.

On the FX markets, euro weakness and a further building of pressure on the CE currencies where the most striking features. EUR/USD yesterday evening already filled bids just below 1.11 (close 1.1125). The USD DXY index rallied to close at 97.58 nearing the cycle top of 97.74. Gains in the yen were modest (USD/JPY close at 114.92). A sharp rise in commodity prices evidently isn’t good news for the Japanese economy. The Swiss franc currently is one of the preferred safe havens with EUR/CHF testing the 1.02 area. The forint (close EUR/HUF 376.25) and the zloty (close EUR/PLN (4.75) both touched all-time/multi-year lows against the euro even as both centrale banks indicated they are ready to intervene in the FX market.

This morning, Asian equities mostly remain under pressure (Nikkei -1.6), Korea and Australia being small exceptions. The dollar outperforms (DXY 97.55) with USD/JPY regaining 115.(15). EUR/USD is again testing the 1.11 barrier. US yields continue yesterday’s decline especially at shorter maturities.

Later today, global risk sentiment will remain the main driver for trading. Even so, the calendar is interesting too, with the EMU January preliminary CPI, the ADP labour market report, Fed Powell testifying before the House and the OPEC+ meeting. Fed Powell will reiterate that the Fed will do its job in containing inflation starting hiking rates this month. Question is whether this will slow the safe haven bid for US bonds at this stage. EMU inflation is at risk of beating expectations for a 0.8% M/M and 5.6%, but we doubt it will change the established trend. In this context, the euro probably is becoming ever more vulnerable. A sustained break blow 1.11 could trigger further stop-loss selling with 1.10 a next intermediate reference.

News Headlines

The World Bank is preparing a $3bn support package for Ukraine for the coming months. It includes a fast-disbursing budget support operation for at least $350 million, followed by $200 million in fast-disbursing budget support for health and education. The IMF meanwhile while consider Ukraine’s request for emergency money with little strings attached through the Rapid Financing Instrument as early next week. The Washington-based fund said it is also continuing to work on a review of Ukraine’s 2020 loan of which $2.2bn remains to pay out.

The barrel of US crude jumped more than 11.5% yesterday and soared another 2% to $111 mark this morning, as the cruelty of the Ukrainian war pushes the US to ban the purchase of Russian oil, and to release – with its allies, circa 60 million barrels from their strategic reserves.

But the strategic reserves will help boost oil supply for only some time; it’s not a durable solution. Therefore, today’s OPEC meeting is critical.

So far, the cartel confirmed that they remain committed to the OPEC+ deal with Russia, and they are not expected to change their production boost plans despite the Ukrainian war. f that’s the case, we shall see the positive pressure on oil prices intensify above the $100 per barrel level, and we could see the barrel of US crude advance toward the $125/150 range.

That’s a big problem, globally, that could gather some reaction from the government heads, as Biden for example has been calling OPEC to increase production since months now.
What’s next?

It’s very difficult to predict what will happen, but at some point, OPEC countries may decide to let go of the OPEC+ alliance, if the Russian oil gets significantly banned. Russian oil is already trading with a significant discount to WTI and Brent crude, as refineries and trading houses are turning away from Russian crude purchases in fear and in preparation of future sanctions.

Exxon Mobil has finally announced to shut down production in Russia as well. The company said it will begin a phased withdrawal from the giant Sakhalin offshore oilfield that it has operated since 1995, saying that they ‘deplore Russia's military action that violates the territorial integrity of Ukraine and endangers its people.’ TotalEnergies, which holds stake in Russia’s biggest LNG producers said, on the other hand, that it won’t get out of Russia for now, but they will stop investing in new projects. The announcement didn’t prevent the share price from falling further.

As a result, OPEC will be increasingly under a political pressure, as the Ukrainian war is becoming a global crisis, and the indirect implications are felt all across the world, particularly via the surging oil and commodity prices, and the world leaders will put all their weight behind it.

Fingers crossed for today’s OPEC+ decision, but again, don’t get your expectations up; OPEC won’t magically decide to come to the rescue.

Market movers today

Everything is still about the Russian invasion of Ukraine and we continue to expect volatile markets near-term. Today, the peace negotiations between Russia and Ukraine continue but with the war continuing we are not sure they will be successful. Markets are seemingly stabilising but risk sentiment remains fragile to any negative news.

Besides that Fed Chair Jerome Powell testifies before lawmakers today. We expect him to signal that tightening is still needed despite elevated uncertainty. Rising commodity prices do not make things easier for the Fed.

Preliminary euro area HICP inflation in February is due out today. We expect inflation accelerated to 5.9% y/y but focus right now is on possible negative consequences on the euro area economy from the Russian invasion and Western sanctions.

Today ECB's chief economist Lane will speak at 17:00 CET on the outlook for the economy, inflation and monetary policy. This is the last chance ahead of next week's ECB meeting to guide markets, as the silent period starts tomorrow.

OPEC+ meets today and looks set to raise output by another 400kb/d.

Danish FX reserves data for February are due out at 17:00 CET.

We expect Bank of Canada to hike the policy rate to 0.50% today, which is also the consensus view.

The 60 second overview

Markets stable overnight: Financial markets have not moved much overnight after risk appetite took a hit again yesterday with especially European equities down and German 10-year yields falling more than 10bp. EUR/USD is broadly flat after dipping below 1.11 yesterday. Oil prices have continued higher reaching USD110 per barrel Brent oil in Asian trading.

Russia/Ukraine war: Russian forces are stepping up their attack on Ukraine and according to Pentagon 80% of troops amassed at the border before the attack has entered Ukraine. A military convoy stretching dozens of miles was heading towards Kyiv yesterday. British military officials said a column of heavy armour had moved to within 30 km of Kyiv. It carried rockets that can reach urban areas of the city.

More sanctions/boycotts: EU last night voted to exclude some Russian banks from Swift but spared the biggest bank Sberbank to ensure energy payments can be made, see Bloomberg. More companies have joined a boycott: Apple, ExxonMobil and Boeing are suspending sales and operations in Russia.

IEA members release oil reserves: The International Energy Agency (IEA) yesterday announced that its' members will release 60 million barrels of oil to stem the rise in oil prices. They also said they will consider "possible additional emergency oil stock draws, as needed". However, oil prices moved higher after the announcement as traders had expected a bigger release. As many banks and ship owners refuse to handle Russian oil at the moment an oil trader estimated around 70% of Russia's oil exports are finding no buyers, see FT.

Biden State of the Union: Three themes dominated Biden's State of the Union speech last night: Russia's aggression against Ukraine, fighting inflation and the corona pandemic. He announced the US would be "closing off American airspace to all Russian flights" and warned of further sanctions saying about Putin "he has no idea what's coming".

Equities: Equities were lower yesterday with a more or less 100% war driven performance. Energy the only sector higher yesterday as the oil price exploded upwards. Europe have the closest ties to Russia and hence no surprise to see European equities underperforming as the war in Ukraine intensifies and uncertainty increases. Defensives continue their massive outperformance of cyclicals. Despite lot of action in equities, the main focus should actually be on bond markets yesterday as the flight to safety made high rated government bond yields plunge across the curve. Banks took another heavy beating with the massive drop in bond yields. VIX ticked higher, closing the day just north of 33.

In US yesterday Dow 1.8%, S&P 500 -1.6%, Nasdaq -1.6% and Russell 2000 -1.9%. The negative sentiment continuing in Asia this morning with most markets being lower. US futures are a little higher this morning just as US bond yields. The picture in Europe is a little more mixed.

FI: It was another dramatic day in the global bond markets as yields "collapsed" with the 10Y German government bond yield declining some 21bp and the German ASW-spreads continued to widen. Hence, it looks as the traditional safe-haven flows whether Bunds and Treasuries outperform other government bonds. However, 10Y BTPS rallied some 30bp and the spread has tightened some 20bp since last week. We expect that the spread tightening is partly due to the expectations that ECB will postpone the rate hike as well as continuing the QE (we still believe in the rate hike in late Q4). This was also seen by the comments from ECB's Rehn, that ECB should not exit stimulus before assessing the impact of the war.

FX: EUR/USD continued lower yesterday and is trading close to 1.11 this morning. Oil prices have hit USD110/barrel, which is a headwind for EUR. CHF is benefitting amid elevated uncertainty and tough sanctions and EUR/CHF is now below 1.0220.

Credit: The Russian invasion of Ukraine and yesterday's added rhetoric on escalations of both sanctions and threats caused the risk appetite in the credit market to remain very low. Itraxx main widened 4.6bp to 75.6bp while xover widened a full 33.4bp to 278.5bp. Cash remains illiquid and bonds from companies with Russian exposure struggles to find any bids.

EUR/USD

The currency pair failed to overcome the resistance at 1.1232 and was strongly sold off with the opening of European markets. Support at 1.1180 has been breached and the bears are testing the bottom again at 1.1107. Prices have failed to bounce off the zone and it is possible that it will be cleared as well. In such a scenario, a new wave of sell-offs is possible, aimed at testing support at 1.1000. Today, a second round of talks is expected between Ukraine and Russia, and with favorable developments, the bulls may return to the market, but while prices are below 1.1290, expectations remain negative. Today, the significant events in the economic calendar are the Eurozone preliminary CPI at 10:00 GMT and the testimony of chairman Powell in front of Congress at 15:00 GMT. However the situation in Ukraine remains a leading factor in market development.

USD/JPY

The resistance at 115.73 was tested once again, and the bears confirmed their intention to maintain their positions. It is likely that the market will continue to trade in the range between support at 114.50 and resistance 115.73. At the moment, the mood is mixed and prices do not find a clear direction.

GBP/USD

Like the euro, the sterling also started the month in the red. The resistance at 1.3434 was tested once again and briefly after a massive sell-off followed. The bottom at 1.3271 has not yet been tested, but the low presence of bulls suggests that such a test is possible. The market shows divergence and if the support at 1.3270 is not cleared, a complex pullback is likely to develop. Prices remain in bears territory until the resistance at 1.3600 is broken. In case of breaking the 1.3270 support, a drop to the next support at 1.3200 is possible.

EUGERMANY40

The German index tanked yesterday and it was one of the worst performing markets. Prices tested again the weekly support at 13800 and briefly managed to violate it. Given the extreme negativity, a strong bounce from the 13800 zone is possible, with the first serious resistance being 14450. If the weekly support is broken, the next zones with the potential to limit the declines are 13630 and 13250. Should prices return above 14450 sentiment would improve significantly, however a suitable catalyst would be needed.

US30

Despite yesterday's declines the US blue chips are performing better than their European peers. The area around 34050 has already been tested several times and if the structure is cleared a strong rally is expected with potential targets being at 34520 and 35010. The first support for the day is 33150, and if it is violated the next one is around 32800-32700. Jerome Powell is expected to testify before the Congress today at 17:00 EET and there may be an increase in volatility during the event.

The Canadian dollar clawed back losses after the Q4 GDP beat expectations. A jump above 90.70 has prompted sellers to cover their bets, opening the door for a potential reversal.

91.10 is the next resistance and its breach could propel the loonie to this year’s high at 92.00. On the downside, the psychological level of 90.00 is a key support to keep the rebound relevant.

Otherwise, a drop to 89.30 would suggest that sentiment remains fragile. In turn, this would place the pair under pressure once again.

The Australian dollar steadied after the RBA warned that energy prices could flare up inflation.

A break above the previous high (0.7285) shows buyers’ strong commitment despite sharp liquidation. Sentiment swiftly recovered and may attract more buying interest. An overbought RSI may temporarily limit the upside. And the bulls could be waiting for a pullback to accumulate.

0.7220 is the closest support. A bullish close above the January peak at 0.7310 could initiate a reversal in the medium-term and extend gains towards 0.7400.

Gold recovered after the first round of peace talks between Ukraine and Russia ended without a resolution. The precious metal found support over 1885.

The rising trendline from early February indicates that the general direction is still up despite a choppy path. The previous peak at 1974 is now a fresh resistance and its breach could send the price to the psychological level of 2000.

The downside risk is a fall below the said support. Then 1852, near the 30-day moving average, would be the bulls’ second line of defense.

Daily Pivots: (S1) 1.1065; (P) 1.1149; (R1) 1.1208; More...

Intraday bias in EUR/USD is back on the downside as fall from 1.1494 resumes by breaking 1.1105 temporary low. Current down trend from 1.2348 should target 61.8% projection of 1.2265 to 1.1120 from 1.1494 at 1.0786. On the upside, break of 1.1273 resistance is needed to be the first sign of bottoming. Otherwise, outlook stays bearish in case of recovery.

In the bigger picture, the decline from 1.2348 (2021 high) is expected to continue as long as 1.1494 resistance holds. Firm break of 1.0635 (2020 low) will raise the chance of long term down trend resumption and target a retest on 1.0339 (2017 low) next. Nevertheless, break of 1.1494 will maintain medium term neutral outlook, and extend range trading first.

Daily Pivots: (S1) 1.3272; (P) 1.3355; (R1) 1.3407; More...

Intraday bias in GBP/USD stays neutral first and further decline is expected with 1.3485 support turned resistance intact. On the downside, break of 1.3272 will target 1.3158 low. Further break there will resume larger down trend from 1.4248. However, firm break of 1.3485 will dampen this bearish view and turn bias back to the upside for 1.3641 resistance.

In the bigger picture, as long as 38.2% retracement of 1.1409 to 1.4248 at 1.3164 holds, up trend from 1.1409 (2020 low) is still in progress. On resumption, next target will be 38.2% retracement of 2.1161 to 1.1409 at 1.5134. Nevertheless sustained break of 1.3164 will argue that whole rise from 1.1409 has completed and bring deeper fall to 61.8% retracement at 1.2493.

Daily Pivots: (S1) 0.9158; (P) 0.9181; (R1) 0.9213; More....

Intraday bias in USD/CHF remains neutral as range trading continues. Choppy rise from 0.8925 would still be in favor to extend higher as long as 0.9090 support holds. Break of 0.9341 will target 0.9372 resistance and then 0.9471. On the downside, however, break of 0.9090 will bring deeper fall back to 0.8925 support.

In the bigger picture, medium term outlook will be neutral at best as long as 0.9471 resistance holds. Larger down trend could still extend through 0.8756 (2021 low). However, firm break of 0.9471 will argue that the trend has already reversed and rebound the rally from 0.8756 with another impulsive move.