Geopolitical risks and inflation worries dominated markets this week with rallies in safe haven assets and Oil markets trading at 9-year highs.
The Market Week – March Week 1
Financial markets have been rocked by the Russian invasion of neighbouring Ukraine. Safe haven assets from the USD to Oil & Gold remain in high demand as stock markets and yields of Government bonds move in the opposite direction. Economic data releases have taken a back seat, but Chair Powell’s testimony to Congress where he confirmed his support for a 25 bps rate hike in March with more come during the year and Friday’s NFP data remain important.
Central banks hold their hawkish tilts as price rises continue to beat expectations and jobs markets continue to tighten. The BOC raised rates this week 25 bps to 50 bps and the BOE and Fed are also still expected to follow suit later this month. However, expectations of big rate hikes have fallen significantly, after Russia’s invasion of Ukraine and the sanctions slapped on it by Western powers.
In FX the USDIndex rallied from 95.60 lows last week to 97.85 highs this week and remains on Bid with strong USD demand. The EURUSD plummeted again to test multi-month lows under 1.1060 from tests at 1.1400 last week, and the USDJPY is biased higher and rotates through 115.00 from highs at 115.80 and lows at 114.50. Cable crashed to 1.3270 from highs of 1.3640 last week.
US stock markets had another volatile week, with the USA500 falling to 4,100 (May 2021 lows), the US100 testing down to 13,000 and the US30 moving down to 32,200 (March 2021 lows). For February the USA500 fell -3.1%, the US30 lost -3.5%, & the US100 shed -3.4%. Year to date the USA500 is down -8.2% with January & February being the biggest two-month drop since March 2020 and the onset of the pandemic.
Gold is trading near a 13-month high as Russia’s war in Ukraine is turning increasingly brutal. Bloomberg reported that bullion backed ETFs increased their holdings by almost 14 tons on Tuesday, “their biggest daily inflow in over a month”. Brent crude prices have risen to around $117 per barrel, (a 9-year high) but stagflation concerns are clouding over central bank outlooks and bullion is trading at $1,930, as investors weigh the impact of sanctions. Even defensive bonds and stocks don’t seem safe enough after Russia put nuclear deterrent forces on high alert. Gold prices rose more than 6% last month, the most since May 2020 after seeing an 18-month high of $1,974 last week.
USOil continues to advance, clocking a high of $115.50, and Brent reached $117.01 per barrel, before settling down to $108.10 and $113.48 respectively at the moment. Western sanctions have so far avoided Russian oil exports, but companies have started to pull out of operations with Russia, with BP, Shell and Exxon announcing plans to abandon their joint venture projects in Russia. At the same time, the Kremlin moved to make these moves more costly with plans to ban foreign investors from selling Russian assets – at least temporarily. Officials may move to release around 60 mln bbl of global strategic reserves, but this is hardly enough to really prevent oil prices from continuing to rise. Orders in China to prioritize security of energy and commodity supply are only the tip of the iceberg and any attempt in Europe to become more independent of Russian oil and gas will take time to put into practice. All this has put even more pressure on Iran nuclear talks, as a deal could see the country resuming its deliveries. However, the talks, which seemed close to conclusion little more than a week ago, narrowly avoided collapse overnight as Iran demanded that the International Atomic Energy Agency ended its investigation into past atomic activities. Iran may feel it has more leverage now as oil prices continue to spike and developments will add to concerns that the world is facing stagflation and another 70s-style oil crisis.
Wednesday’s inventories showed a significant variance with a drawdown of 2.6 million barrels against expectations of a 2.5 million barrel build. This came after last week’s big 4.5 million-barrel build.
The yields remain the key driver of the markets once again, with the US benchmark 10-yr yield moving to 1.682% lows on Wednesday from over 2.00% last week as US Government Treasuries see strong safe-haven demand.
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Stuart Cowell
Head Market Analyst
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