Sive Morten
Special Consultant to the FPA
- Messages
- 18,673
Fundamentals
So, we've got absolutely crazy week, guys, on Thursday I thought that my phone should explode. For the trading process, it's hard to call a positive time. Geopolitical factors make an external impact that increases volatility in times and the trading process becomes really tough. As big events just have happened, we have a chance that within one, maybe two weeks, markets mostly will be driven by financial factors again, that would be nice. From this standpoint we have an important week - J. Powell's speech in Congress on the 2-3rd of March, that I would call as preliminary hearing of the coming rate hike, and NFP release on Friday.
Market overview
The U.S. dollar jumped to its highest level in nearly two years and the Russian rouble plunged to a record low on Thursday after military escalation, as investors fled risk assets and moved toward safe-haven assets. The dollar index rose 0.869% and was on pace for its biggest daily percentage gain since March 2020, when U.S, markets were in the throes of the first wave of the COVID-19 pandemic. The greenback reached a high of 97.740 against a basket of major currencies, its highest since June 30, 2020.
The greenback has been subdued recently as tensions in Ukraine have increased and fueled speculation the U.S. Federal Reserve may be less aggressive in tightening policy at its March meeting. Expectations for at least a 50-basis-point interest rate hike have dropped to 7.5% from around 34% a day ago, according to CME's FedWatch Tool.
U.S. Federal Reserve officials on Thursday began taking stock of how the unfolding conflict in Ukraine might influence the economy and their planned shift to tighter monetary policy, with investors and some officials suggesting it could slow but likely not stop a planned round of interest rate increases. Oil and commodity price shocks and a possible blow to global growth and confidence were clear risks, analysts said, and one Fed policymaker said the events of the last 24 hours could weigh on upcoming Fed decisions.
The risks could be as obvious as high oil prices weighing on consumer spending and rising inflation even further, or as unknowable as how Russia might respond to U.S. sanctions.
The Fed plans to raise interest rates beginning in March as it battles inflation that has hit multi-decade highs. Fed policy has already been complicated by the unpredictable impact of a once-in-a-century pandemic, and must now account for a likely energy price shock and other uncertainty following Russia's military move into Ukraine.
But the events overnight have dealt the central bank an unexpected new dynamic, an echo of the oil price shocks of the 1970s that were also driven by geopolitical conflict. In that case, it was war and other tension in the Middle East and came at a time when the U.S. economy was far more dependent on imported energy, and U.S. industry far less energy efficient. Still, Fed officials were beginning to think through the implications of an event that had the potential to both slow growth and add to inflation.
San Francisco Fed President Mary Daly said that with U.S. inflation as high as it is and the labor market strong, the Fed should go ahead with rate hikes even with the uncertainty of military events.
The immediate economic risk appears larger for Europe than the United States, with European Central Bank policymakers convening Thursday in a previously scheduled "informal" gathering that may become a crisis meeting. Still, the crisis threatens to delay the resolution of prominent factors that have fanned U.S. inflation higher such as global supply bottlenecks, which could keep price pressures high while denting growth prospects.
As a result, the U.S. dollar dipped on Friday, giving back some of the strong gains from the previous day, as investors gauged the latest round of sanctions on Russia and U.S. inflation data was seen as unlikely to make the Federal Reserve overly aggressive at its next policy meeting.
U.S. economic data showed consumer spending increased more than expected in January even as price pressures mounted, with annual inflation hitting rates last seen four decades ago, although the personal consumption expenditures price index increased 0.6% in January after rising 0.5% in December.
In the US central bank's latest monetary policy report to Congress, the Fed warned inflation could last longer than anticipated should labor shortages and fast-rising wages continue. Policymakers at the European Central Bank (ECB) said the situation in Ukraine could cause the ECB to slow its exit from stimulus measures. Investors see only a 4% chance the ECB will boost its benchmark interest rate by 10 basis points at its March 10 policy meeting.
European Central Bank policymakers are gathering on Thursday for what may have become a crisis meeting as Russia's invasion of Ukraine threatens to derail economic growth in the eurozone and complicate the ECB's path out of negative interest rates. The ECB's "informal get-together" was aimed at preparing a decision on March 10 on the likely end of the ECB's bond-buying stimulus programme, paving the way for the first-rate hike in more than a decade to tackle surprisingly high inflation.
The situation in Eastern Europe overnight has changed the picture by raising the prospect of higher energy costs, financial turmoil and lower trade for the euro zone, which relies on Russian gas for 40% of its needs.
Stournaras, among the 'doves' of the ECB's Governing Council who favor an easier monetary policy stance, added the central bank should continue buying bonds at least until the end of the year to cushion the impact of conflict in Ukraine
Even his Austrian peer Robert Holzmann, seen as a 'hawk', said events in Ukraine may delay the ECB's exit from stimulus measures, Bloomberg reported later. Isabel Schnabel, an ECB board member who is also seen as a hawk, said the "shock of war" had clouded the outlook for the economy just as inflation was taking hold in the eurozone and allowing the ECB to withdraw its stimulus measures.
Analysts concurred that the ECB was now likely to slow down the withdrawal of its support measures.
For many investors it's a case now of wait and see what unfolds in the days ahead, such as the extent of sanctions, where energy prices settle and how central banks react. Comments in the last 24 hours suggest major central banks will stick to their plans to tighten monetary policy in the face of inflation running at its highest level in decades.
Fed Governor Christopher Waller on Thursday laid out the case for raising U.S. interest rates by a full percentage point by mid-summer. Some European Central Bank officials have suggested the invasion doesn't fundamentally change the economic outlook. Still, a fresh wave of uncertainty means caution is likely.
The most aggressive rate hike bets baked into markets have been dialled back further, lifting sovereign bond markets. But no doubt, with oil prices shooting above $100 a barrel following the invasion, another upward near-term shock to inflation is likely. European natural gas soared more than 60% at one point on Thursday before settling to close just over 30% higher.
Decoupling Russia: the global economy's new unknown
Western economic sanctions heap a new set of unknowables on a global economy already distorted by the coronavirus pandemic and a decade of ultra-cheap money. The bid to exclude from the trading system whole chunks of the world's 11th largest economy -- and supplier of one-sixth of all commodities -- has no precedent in the globalized age.
Sanctions unveiled so far will hit Russian banks' business in dollars, euros, pounds and yen. U.S. export curbs will restrict Russian access to electronics and computers while European capitals are fine-tuning similar export controls and measures to target the energy and transport sectors.
For now, they won't condemn the Russian economy to anything like isolation: the gas on which Europe depends will keep flowing and Russia's banks will retain access to the SWIFT global bank messaging system. But further punitive measures remain possible, while the chaos of conflict and prospective counter-measures by Moscow make it likely there will be some decoupling of the Russian economy and its huge resources.
Oxford Economics said it now sees global inflation this year at 6.1%, up from 5.4%, citing the impact of sanctions, financial market disruption and higher gas, oil and food prices. While that will add to cost-of-living worries, Oxford reduced its forecast for global output growth by a modest 0.2 points to 3.8% this year and by just 0.1 points to 3.4% in 2023.
That small dose of "stagflation" is a headache for central banks trying to reduce stimulus and return base rates to something like normal after a decade near zero.
But for now, the consensus is that tightening can cautiously go-ahead.
Even without excluding Russian banks from SWIFT, the mere whiff of legal consequences for any Western bank found to have breached sanctions could have a "chilling effect on business", one specialist lawyer told Reuters. The same goes for other financial services.
How sanctions will apply to Russia's vast energy and commodity resources remains opaque. Russia produces 10% of global oil and supplies 40% of Europe's gas. It is the world's largest grains and fertilizers exporter, top palladium and nickel producer, third-largest exporter of coal and of steel, and fifth-largest wood exporter.
Russian Economy Ministry said on Friday it had expected the sanctions pressure faced since Russia's 2014 annexation of Crimea to intensify, and that it plans to step up trade and economic ties with Asian countries.
Such a pivot would depend notably on Beijing seeing interest in a China-Russia trading bloc that could emerge as a viable alternative to Western channels.
"It could force companies to have two separate supply chains to serve each one," Jacob Kirkegaard at German Marshall Fund said of a development that would reverse decades of attempts to streamline trade channels for efficiency. Coming after the pandemic-era supply chain problems, that could exacerbate price hikes and goods shortages which are hurting the world economy.
Besides, Russia hasn't announced any sanctions imposed on the EU and the US by far, but they should follow.
Inflation will have the biggest impact on global markets in 2022, traders said, while liquidity was the top daily trading challenge for a sixth year, according to an annual survey of institutional trading clients by JPMorgan published on Wednesday. About 48% of 718 institutional trading clients surveyed at the end of November 2021 highlighted inflation as this year's biggest market mover, displacing the global pandemic, which topped last year's list.
Economic dislocation and the pandemic were the next factors seen as having the biggest impact, each polling at 13%.
The German economy will probably shrink again in the current quarter as a new wave of coronavirus infections stops many people from going to work, the Bundesbank said on Monday, while predicting a rebound in the spring. Europe's largest economy went into reverse in the last three months of 2021 as its large industrial sector was hit by supply snags. These were now easing but the rapid spread of the Omicron variant was affecting services and employment in general.
The Bundesbank said German industry was providing "a positive impulse" to the economy thanks to easing supply bottlenecks and high demand, setting the stage for a rebound in the spring if the pandemic subsided.
This war will last, says French President Macron. French President Emmanuel Macron predicted that the war would last and bring with it long-term consequences.
Speaking at France's annual agriculture fair, he said -
Some investors expect geopolitical tensions to continue plaguing markets, as the implications from the war in Ukraine become clearer.
Kyle Bass, founder and chief investment officer of hedge fund Hayman Capital Management, believes investors still have not factored in all of the possible outcomes that could result from Russia's invasion of Ukraine, including a prolonged conflict that weighs on global growth and sends inflation higher by pushing up commodity prices.
Bass said investors should own assets that can hold value during inflationary times, such as commodities and real estate. Though Ukraine remains in flux, those in favor of buying on weakness argue that stock declines from past geopolitical events have been short-lived. LPL Financial's study of 37 major geopolitical events since World War Two found that stocks were up an average of 11% one year later, provided a recession does not occur.
BlackRock earlier this week added to its strategic overweight in equities, saying investors may be overestimating how hawkish central banks will need to be in their battle against inflation. JPMorgan's analysts, meanwhile, argued that "initial volatility around rate liftoff didn't last and equities made new all-time highs 2-4 quarters out."
Others, however, are taking a more dour view, as the markets price in Fed tightening in the face of soaring inflation.
"We're bearish," analysts at BofA Global Research wrote in a recent note, saying they believe the "bull era of central bank excess, Wall St inflation, (and) globalization" is ending, to be replaced by a "bear era" of inflation and geopolitical isolationism.
British consumer confidence suffered its biggest month-on-month drop in February since the start of the coronavirus pandemic, as people worried about fast-rising inflation, higher taxes, and interest rates going up, a survey showed on Friday.
The GfK Consumer Confidence Index slumped to -26 from -19 in February to touch its lowest level since January of last year when Britain was under a tight lockdown.
Sentiment about the next 12 months for personal finances and the wider economic situation fell particularly heavily.
COT Report
This week's data hardly shows an adequate picture, in general, we just run out of the EUR. Investors have closed as longs as shorts, although the drop of open interest was insignificant. In general, changes are positive - net long speculative position has increased as bears have closed more positions. Hedgers also have increased exposition against EUR growth.
Speculators cut their net long U.S. dollar positions in the latest week, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday. The value of the net long dollar was $5.80 billion in the week ended Feb. 22, compared with a net long of $6.76 billion the previous week. Another large consensus trade has been long euros where net longs are at six-month highs and rose by $1.2 billion in the latest week, according to CFTC.
To be continued...
So, we've got absolutely crazy week, guys, on Thursday I thought that my phone should explode. For the trading process, it's hard to call a positive time. Geopolitical factors make an external impact that increases volatility in times and the trading process becomes really tough. As big events just have happened, we have a chance that within one, maybe two weeks, markets mostly will be driven by financial factors again, that would be nice. From this standpoint we have an important week - J. Powell's speech in Congress on the 2-3rd of March, that I would call as preliminary hearing of the coming rate hike, and NFP release on Friday.
Market overview
The U.S. dollar jumped to its highest level in nearly two years and the Russian rouble plunged to a record low on Thursday after military escalation, as investors fled risk assets and moved toward safe-haven assets. The dollar index rose 0.869% and was on pace for its biggest daily percentage gain since March 2020, when U.S, markets were in the throes of the first wave of the COVID-19 pandemic. The greenback reached a high of 97.740 against a basket of major currencies, its highest since June 30, 2020.
The greenback has been subdued recently as tensions in Ukraine have increased and fueled speculation the U.S. Federal Reserve may be less aggressive in tightening policy at its March meeting. Expectations for at least a 50-basis-point interest rate hike have dropped to 7.5% from around 34% a day ago, according to CME's FedWatch Tool.
U.S. Federal Reserve officials on Thursday began taking stock of how the unfolding conflict in Ukraine might influence the economy and their planned shift to tighter monetary policy, with investors and some officials suggesting it could slow but likely not stop a planned round of interest rate increases. Oil and commodity price shocks and a possible blow to global growth and confidence were clear risks, analysts said, and one Fed policymaker said the events of the last 24 hours could weigh on upcoming Fed decisions.
The risks could be as obvious as high oil prices weighing on consumer spending and rising inflation even further, or as unknowable as how Russia might respond to U.S. sanctions.
The Fed plans to raise interest rates beginning in March as it battles inflation that has hit multi-decade highs. Fed policy has already been complicated by the unpredictable impact of a once-in-a-century pandemic, and must now account for a likely energy price shock and other uncertainty following Russia's military move into Ukraine.
But the events overnight have dealt the central bank an unexpected new dynamic, an echo of the oil price shocks of the 1970s that were also driven by geopolitical conflict. In that case, it was war and other tension in the Middle East and came at a time when the U.S. economy was far more dependent on imported energy, and U.S. industry far less energy efficient. Still, Fed officials were beginning to think through the implications of an event that had the potential to both slow growth and add to inflation.
San Francisco Fed President Mary Daly said that with U.S. inflation as high as it is and the labor market strong, the Fed should go ahead with rate hikes even with the uncertainty of military events.
The immediate economic risk appears larger for Europe than the United States, with European Central Bank policymakers convening Thursday in a previously scheduled "informal" gathering that may become a crisis meeting. Still, the crisis threatens to delay the resolution of prominent factors that have fanned U.S. inflation higher such as global supply bottlenecks, which could keep price pressures high while denting growth prospects.
As a result, the U.S. dollar dipped on Friday, giving back some of the strong gains from the previous day, as investors gauged the latest round of sanctions on Russia and U.S. inflation data was seen as unlikely to make the Federal Reserve overly aggressive at its next policy meeting.
U.S. economic data showed consumer spending increased more than expected in January even as price pressures mounted, with annual inflation hitting rates last seen four decades ago, although the personal consumption expenditures price index increased 0.6% in January after rising 0.5% in December.
In the US central bank's latest monetary policy report to Congress, the Fed warned inflation could last longer than anticipated should labor shortages and fast-rising wages continue. Policymakers at the European Central Bank (ECB) said the situation in Ukraine could cause the ECB to slow its exit from stimulus measures. Investors see only a 4% chance the ECB will boost its benchmark interest rate by 10 basis points at its March 10 policy meeting.
European Central Bank policymakers are gathering on Thursday for what may have become a crisis meeting as Russia's invasion of Ukraine threatens to derail economic growth in the eurozone and complicate the ECB's path out of negative interest rates. The ECB's "informal get-together" was aimed at preparing a decision on March 10 on the likely end of the ECB's bond-buying stimulus programme, paving the way for the first-rate hike in more than a decade to tackle surprisingly high inflation.
The situation in Eastern Europe overnight has changed the picture by raising the prospect of higher energy costs, financial turmoil and lower trade for the euro zone, which relies on Russian gas for 40% of its needs.
Stournaras, among the 'doves' of the ECB's Governing Council who favor an easier monetary policy stance, added the central bank should continue buying bonds at least until the end of the year to cushion the impact of conflict in Ukraine
Even his Austrian peer Robert Holzmann, seen as a 'hawk', said events in Ukraine may delay the ECB's exit from stimulus measures, Bloomberg reported later. Isabel Schnabel, an ECB board member who is also seen as a hawk, said the "shock of war" had clouded the outlook for the economy just as inflation was taking hold in the eurozone and allowing the ECB to withdraw its stimulus measures.
Analysts concurred that the ECB was now likely to slow down the withdrawal of its support measures.
For many investors it's a case now of wait and see what unfolds in the days ahead, such as the extent of sanctions, where energy prices settle and how central banks react. Comments in the last 24 hours suggest major central banks will stick to their plans to tighten monetary policy in the face of inflation running at its highest level in decades.
Fed Governor Christopher Waller on Thursday laid out the case for raising U.S. interest rates by a full percentage point by mid-summer. Some European Central Bank officials have suggested the invasion doesn't fundamentally change the economic outlook. Still, a fresh wave of uncertainty means caution is likely.
The most aggressive rate hike bets baked into markets have been dialled back further, lifting sovereign bond markets. But no doubt, with oil prices shooting above $100 a barrel following the invasion, another upward near-term shock to inflation is likely. European natural gas soared more than 60% at one point on Thursday before settling to close just over 30% higher.
Decoupling Russia: the global economy's new unknown
Western economic sanctions heap a new set of unknowables on a global economy already distorted by the coronavirus pandemic and a decade of ultra-cheap money. The bid to exclude from the trading system whole chunks of the world's 11th largest economy -- and supplier of one-sixth of all commodities -- has no precedent in the globalized age.
Sanctions unveiled so far will hit Russian banks' business in dollars, euros, pounds and yen. U.S. export curbs will restrict Russian access to electronics and computers while European capitals are fine-tuning similar export controls and measures to target the energy and transport sectors.
For now, they won't condemn the Russian economy to anything like isolation: the gas on which Europe depends will keep flowing and Russia's banks will retain access to the SWIFT global bank messaging system. But further punitive measures remain possible, while the chaos of conflict and prospective counter-measures by Moscow make it likely there will be some decoupling of the Russian economy and its huge resources.
Oxford Economics said it now sees global inflation this year at 6.1%, up from 5.4%, citing the impact of sanctions, financial market disruption and higher gas, oil and food prices. While that will add to cost-of-living worries, Oxford reduced its forecast for global output growth by a modest 0.2 points to 3.8% this year and by just 0.1 points to 3.4% in 2023.
That small dose of "stagflation" is a headache for central banks trying to reduce stimulus and return base rates to something like normal after a decade near zero.
But for now, the consensus is that tightening can cautiously go-ahead.
Even without excluding Russian banks from SWIFT, the mere whiff of legal consequences for any Western bank found to have breached sanctions could have a "chilling effect on business", one specialist lawyer told Reuters. The same goes for other financial services.
How sanctions will apply to Russia's vast energy and commodity resources remains opaque. Russia produces 10% of global oil and supplies 40% of Europe's gas. It is the world's largest grains and fertilizers exporter, top palladium and nickel producer, third-largest exporter of coal and of steel, and fifth-largest wood exporter.
Russian Economy Ministry said on Friday it had expected the sanctions pressure faced since Russia's 2014 annexation of Crimea to intensify, and that it plans to step up trade and economic ties with Asian countries.
Such a pivot would depend notably on Beijing seeing interest in a China-Russia trading bloc that could emerge as a viable alternative to Western channels.
"It could force companies to have two separate supply chains to serve each one," Jacob Kirkegaard at German Marshall Fund said of a development that would reverse decades of attempts to streamline trade channels for efficiency. Coming after the pandemic-era supply chain problems, that could exacerbate price hikes and goods shortages which are hurting the world economy.
Besides, Russia hasn't announced any sanctions imposed on the EU and the US by far, but they should follow.
Inflation will have the biggest impact on global markets in 2022, traders said, while liquidity was the top daily trading challenge for a sixth year, according to an annual survey of institutional trading clients by JPMorgan published on Wednesday. About 48% of 718 institutional trading clients surveyed at the end of November 2021 highlighted inflation as this year's biggest market mover, displacing the global pandemic, which topped last year's list.
Economic dislocation and the pandemic were the next factors seen as having the biggest impact, each polling at 13%.
The German economy will probably shrink again in the current quarter as a new wave of coronavirus infections stops many people from going to work, the Bundesbank said on Monday, while predicting a rebound in the spring. Europe's largest economy went into reverse in the last three months of 2021 as its large industrial sector was hit by supply snags. These were now easing but the rapid spread of the Omicron variant was affecting services and employment in general.
The Bundesbank said German industry was providing "a positive impulse" to the economy thanks to easing supply bottlenecks and high demand, setting the stage for a rebound in the spring if the pandemic subsided.
This war will last, says French President Macron. French President Emmanuel Macron predicted that the war would last and bring with it long-term consequences.
Speaking at France's annual agriculture fair, he said -
Some investors expect geopolitical tensions to continue plaguing markets, as the implications from the war in Ukraine become clearer.
Kyle Bass, founder and chief investment officer of hedge fund Hayman Capital Management, believes investors still have not factored in all of the possible outcomes that could result from Russia's invasion of Ukraine, including a prolonged conflict that weighs on global growth and sends inflation higher by pushing up commodity prices.
Bass said investors should own assets that can hold value during inflationary times, such as commodities and real estate. Though Ukraine remains in flux, those in favor of buying on weakness argue that stock declines from past geopolitical events have been short-lived. LPL Financial's study of 37 major geopolitical events since World War Two found that stocks were up an average of 11% one year later, provided a recession does not occur.
BlackRock earlier this week added to its strategic overweight in equities, saying investors may be overestimating how hawkish central banks will need to be in their battle against inflation. JPMorgan's analysts, meanwhile, argued that "initial volatility around rate liftoff didn't last and equities made new all-time highs 2-4 quarters out."
Others, however, are taking a more dour view, as the markets price in Fed tightening in the face of soaring inflation.
"We're bearish," analysts at BofA Global Research wrote in a recent note, saying they believe the "bull era of central bank excess, Wall St inflation, (and) globalization" is ending, to be replaced by a "bear era" of inflation and geopolitical isolationism.
British consumer confidence suffered its biggest month-on-month drop in February since the start of the coronavirus pandemic, as people worried about fast-rising inflation, higher taxes, and interest rates going up, a survey showed on Friday.
The GfK Consumer Confidence Index slumped to -26 from -19 in February to touch its lowest level since January of last year when Britain was under a tight lockdown.
Sentiment about the next 12 months for personal finances and the wider economic situation fell particularly heavily.
COT Report
This week's data hardly shows an adequate picture, in general, we just run out of the EUR. Investors have closed as longs as shorts, although the drop of open interest was insignificant. In general, changes are positive - net long speculative position has increased as bears have closed more positions. Hedgers also have increased exposition against EUR growth.
Speculators cut their net long U.S. dollar positions in the latest week, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday. The value of the net long dollar was $5.80 billion in the week ended Feb. 22, compared with a net long of $6.76 billion the previous week. Another large consensus trade has been long euros where net longs are at six-month highs and rose by $1.2 billion in the latest week, according to CFTC.
To be continued...
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