Tickmill UK Daily Market Notes

[tickmill-news]

US fiscal stimulus risk spoils Christmas rally

A new week has come and it must be admitted that “contrarian” New Year rally, despite the storm of decisions by central banks last week, did not take place. Last Friday's pessimism seeped into investor sentiment on Monday, European markets and US futures slumped. Investors were upset by the news that a large spending package in the United States, the so-called Build Back Better may not be approved (its approval has hitherto been taken for granted), as Democrat Senator Manchin unexpectedly objected, saying that he could vote against. The politician's stance really should be taken seriously: Goldman Sachs removed the fiscal stimulus from its baseline scenario, and also lowered its forecast for US economic growth in the first quarter from 3% to 2% in the first quarter, from 3.5% to 3.0% in the second quarter and from 3.0% up 2.75% in the third quarter.

Along with the sell-off of risk assets, the yield of Treasuries, both near and long term, continues to slide at a moderate pace. It is noteworthy that the dollar was growing on Friday amid correction of equities, and today it is declining along with them, especially losing ground against the European currency. At the same time, EM holds well against the dollar, USDRUB does not yield to risk-off trading near the opening. This all looks very much like investor bets are dropping on the Fed starting to raise rates shortly after the end of the QE and this is likely due to the fact that the FOMC was considering that fiscal policy would pick up the stimulus baton in the form of the aforementioned spending package, when monetary incentives begin to gradually recede into the background. Now a situation is potentially emerging where this will not happen, which implies a risk for the forecast of monetary tightening. In other words, the market may perceive now that the failure to approve the spending package will force the Fed to postpone the rate hike. Goldman adheres to the same position, already doubting its previous forecast that the first increase in the federal funds rate will occur in March 2022. Against this background, currencies, where central banks are actively trying to suppress inflation by tightening policy, look attractive.

In addition to the increased attention to the prospects for fiscal stimulus in the US, this week it is worth taking a closer look at such reports as consumer confidence in Germany from GfK, consumer confidence from U. Michigan, as well as profits from Chinese industrial enterprises. By the way, speaking of the Chinese economy, the story is gaining momentum that in the cycle of tightening-easing regulation, increasing-decreasing leverage in the economy by the Chinese government, a favorable phase is beginning, as forecasts for the growth of the Chinese economy are declining (only 3.3% YoY this quarter) as well as the growing risks of external demand, which to a large extent influences economic activity of China. A few weeks ago, instructions were issued to the banking sector to increase lending to small and medium-sized enterprises, companies engaged in the renewable energy sector and developers, and to increase the issuance of mortgages. In addition, PBOC recently lowered the reserve ratio for banks (the main policy instrument of the Central Bank). With the increase in the number of stimulus measures, it can be expected that the stimulating effect will seep into external markets, and in addition, this should stimulate the demand for risk locally, including for securities of distressed developers.

 

[tickmill-news]

FOMC December minutes: no time to wait

The minutes of the last Fed meeting was a surprise for investors, despite the fact that Powell at the press conference clearly outlined the course for policy tightening. Inflation in the US is on the rise and the covid is expected to only fuel this trend, so the central bank needs decisive action to maintain price stability. Minutes showed that officials discussed an increase in the pace of curtailment of asset purchases, as well as a transition to a rate-hiking cycle earlier than expected, while the document said that this opinion is shared by “many” of the participants, that is, the consensus tends to increasing the pace reduction of monetary support for the economy. In other words, at the next meeting, the Fed goal will most likely be to communicate the plans about a rate hike already in the first quarter of 2022. Previously, this scenario was not a baseline, although it figured in the forecasts of large US investment banks.
Equity markets, as expected, reacted negatively to the news; one of the important barometers of investor risk preferences, the crypto market, also tanked right after the release of the Minutes, which clearly illustrates what was the key driver behind crypto rally in 2021. Treasury yields also reacted accordingly, pushing through the previous local high (1.7%), although it should be noted that the scenario of Fed becoming more decisive in its response to inflation has been priced in since the beginning of the year, when 10Y Treasury yields began to rally sharply from the 1.5% pivot point:

The dollar reacted positively to the news, but somewhat trimmed gains today. Speculations about what the next step will be for the Fed is unambiguously favoring the strengthening of the dollar, since other central banks, in particular those with low-yielding currencies, cannot offer a compelling counter-argument to the Fed’s stance. Nevertheless, it should be noted that, for example, the German sovereign debt market is trying to price in that the ECB will follow the suit of the Fed - the yield on 10-year bonds opened with a gap up and is trading in the area of -0.04% at the time of writing. This is a highest level for two and a half years.
With increasing attention from central banks, including leading ones, to the outlook for inflation, today's German inflation report could spark a strong market reaction, especially if the forecast that price pressures have peaked in the main Eurozone economy is confirmed. Annual inflation in December is projected at 5.1%, anything below is likely to weaken the euro against the dollar, setting the stage for a breakout below 1.13:

Some support for EURUSD is provided by risk-off in the market - European investors are trimming their investments in foreign risk assets and the outflows are offering support to the common currency. When the fall in risk assets stabilizes, one can expect that the selling pressure on EURUSD will subside too
The upside potential for the dollar is expected to become more evident today after the release of ISM's services PMI report. Two sub-indices will be of primary importance - incoming prices and hiring. The second indicator will allow you to estimate what kind of surprise to expect from the NFP report. The Omicron wave in the US could have held back hiring and a weak NFP print may well be attributed to the continuing imbalance between strong labor demand and a shortage of labor supply. The dollar is likely to focus on wage growth rather than job creation, as this is now a key proxy for labor market imbalances and a possible Fed’s aggressive shift in stance.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

Post-Fed Minutes market rush eases, NFP in focus


The rush in the markets after the Fed minutes has somewhat subsided and investors are turning their eye on the release of US labor market data today. According to the consensus forecast, the economy added 400K jobs while wages rose 0.4% on a monthly basis. The ADP report released on Wednesday, which more than doubled the forecast (807K job growth), laid the groundwork for expectations of a positive surprise today. However, the ISM Service PMI was disappointing yesterday, where the headline reading fell short of expectations, but remained strong (62 points), the hiring sub-index was also below forecasts (54.9 points versus 56.5 expectations). The sub-index of prices paid remained near multi-year highs (82.5 points). The key parameter in terms of the implications for the Fed's policy is wage growth, since the Central Bank is now concerned about inflation, and wage inflation is seen as one of the precursors of the growth of consumer prices. The lack of job growth relative to the forecast and strong growth in wages will most likely not change the expectations regarding the March Fed rate hike, which odds are now estimated by the market at about 66%:

The chances of a rate hike almost doubled after the release of minutes from the Fed's December meeting.

A weak Payrolls reading, combined with sluggish wage growth, could trigger a situation where early signs of a slowdown in the economy coincide with a hawkish shift in Fed rhetoric, which could worsen growth expectations and put risk assets at risk. Weak labor data have a positive effect on risk assets when there are expectations of slowdown and recession and expectations that the Fed is on an easing path. Now the situation is different, so the market will interpret the effect of a negative report on the labor market as it is, and not vice versa.

In favor of the strong Payrolls report is the important fact that the slowdown in activity due to Omicron began in the second half of December, while the collection of statistics for the NFP ended on December 18th.

The German inflation report surprised yesterday, providing significant support to the euro. Expectations that inflation will recede were not confirmed. The headline inflation rate was 5.3% YoY against the forecast of 5.1%, the spread between short US and German bonds retreated from the recent local high, given the fact that the outlook for accelerating inflation in both countries have somewhat leveled off:

Also, the European currency was supported by the data for the EU bloc: core inflation beat forecasts rising to 2.6% YOY, retail sales grew much faster than expected - 7.8% against the forecast of 5.6%.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

USD benefits a surge in risk-off, bonds point to a possible Fed overreaction

Asian and European markets are in the red on Monday with the weakness of US equities on past Friday being key catalyst of downward momentum. Investors increased demand for cash amid growing risk-off mood helping USD to stand out among G10 peers. Interestingly, 10-year bond yields extended decline after hitting 1.90% peak in the last week as market participants appear to be pricing in an excessive and actually belated Fed response to inflation, which could lead to a slowdown in the economy in inflation in the long term. The yield decline factor has a negative effect on the dollar. Sovereign debt of other advanced economies is also in demand today, which, coupled with the decline in risk assets, is a signal that economic growth forecasts may be being revised lower by the market.
In turn, short-term US bond yield resists decline reflecting expectations of an aggressive Fed tightening move at the upcoming meeting. The spread between 10-year and 2-year bonds is spiraling down, which often constitutes expectations of economic stagnation or a policy error by the Fed:

Escalating tensions between Russia and NATO is another source of bearish concerns. Oil shows uncharacteristic resistance to risk-off, remaining at a multi-year peak due to fears that sanctions pressure on Russia will exacerbate present supply issues in the energy market. Accordingly, any signs of a de-escalation of tension may open the way down for oil as the risk-off factor can be countered only by the factor of OPEC persisting short-term undersupply, which, in principle, have been priced in by the market. The ruble is the worst in the EM currency sector, braces for breakout of 79 mark, the highest level since 2020.
Regarding the Fed meeting, the key point will be the weight of the balance sheet offloading in the normalization of policy. If the Fed puts more weight on QT, the forecast of four rate hikes this year could be in jeopardy, leading to a rollback of expectations, taking away support from USD.
EU and UK Services and Manufacturing PMI data showed that the impact of the Omicron outbreak on economic activity was moderate, with price pressures building again in the services sector. The Bank of England will hold a meeting on the fourth of February and the chances of a rate hike are growing especially in light of inflation signals.
The Bank of Canada meeting will take place on Wednesday and we should expect a 25 bp rate hike thanks to progress in employment and clear signs that inflation needs to be contained. The case of USDCAD revisiting 1.25 could mean the risk of breaking the key trend line and moving to a protracted downward movement:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

EURUSD aims at 1.10 as the ECB will likely disappoint again next week



There was a sign of relief on geopolitical front, welcomed by asset markets, after the Russian Foreign Ministry said that a war with Ukraine was “unthinkable”, hinting that diplomatic resolution of the conflict may be in cards. The market focus today is on a portion of US price and employment data, namely PCE and employment cost indexes, which should help to calibrate better the chances of the Fed rate hike in March by 50 bp.

The dollar broke yesterday to a new high on the back of quickening divergence of the Fed’s policy with its major peers and Powell’s signal that the economy should be able to digest the rapid pace of rate hikes. Powell’s remark, that there is enough room to raise rates without the risk of disrupting the recovery of the labor market, thrown at a press conference, signaled that the Fed could go all out with the terminal interest rate being higher than expected in the end of tightening cycle. The US yield curve is flattening, which is the classic bond market fear that the Fed's policy will choke growth, which in turn leads to conclusion that inflation premium embedded in long-term yield becomes excessive and should be corrected lower.

Futures markets priced in 31 bp rate hike in March which means the dollar still has room to rise if incoming data points to strong economic activity early in the year warranting more aggressive Fed move. At the same time, ceteris paribus, weak US data in February may shift the market consensus back towards 25 bp, causing USD to fall out of favor and pull back a bit.

Q4 Labor Cost Growth in US is expected to be at 1.2%, despite a rather strong growth of 1.3% in the third quarter of 2021. The dollar is likely to react positively to higher-than-expected print, as wage dynamics are now under close attention of central banks due to running imbalances in supply and demand of labor which work as a good predictor of how long high inflation will persist and will there be a second and even third-round inflation effects.

Currencies that depend on the cycle and correlated with risk assets are likely to be able to go into an upward correction against the dollar next week, which cannot be said, for example, about EUR or JPY. German GDP data disappointed today (1.4% vs. 1.8% forecast), which was another reminder that the ECB is unlikely to rush to catch up with the Fed at the upcoming meeting. EURUSD may be looking for support somewhere near 1.10:

Looking at the second group of currencies, there is an interesting opportunity to buy the dip in AUDUSD after a strong fall in the area of 0.69-0.6950 before the RBA meeting next week. A set of strong Australian inflation data could form a solid foundation for a hawkish CB decision next week:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

B] Hawkish BoE and ECB put greenback under great pressure as policy gap with the Fed narrows [/B]


Dollar reversed gains made in the first half of Thursday session with the DXY shedding nearly half a percentage point after EU and UK central banks signaled that they would be catching up with the Fed in terms of policy tightening. The Bank of England raised the rate to 0.5%, however, the fact that 4 out of 9 officials voted for an increase to 0.75% makes it clear that the BoE has not finished the tightening cycle and if inflation persists, then the markets should be ready to price in another rate hike on one of the upcoming meetings, in March or maybe in May. In addition, the BoE has completed QE program and will gradually move to the sale of assets from the balance sheet.

The limit of the current cycle of raising rates by the Bank of England should be the level of 1%. For now, policymakers have said they will "consider" actively selling government bonds to speed up the process of reducing their balance sheet. Needless to say, this is uncharted territory for any mature central bank and could prove to be much more of a challenge than simply stopping reinvestment, especially if the Bank finds itself selling during a market turmoil.

In case of weak NFP print tomorrow, which may somewhat soften expectations regarding the Fed's March rate hike, GBPUSD has the opportunity to continue moving within the uptrend and test the level of 1.38 as the BoE’s policy gap with the Fed apparently narrows:

The ECB announcement contained no surprises, but Lagarde's hawkish comments allowed the Euro to challenge 1.14, the highest level since mid-January. Weak labor data tomorrow will likely give a green light for EURUSD to test the horizontal resistance at 1.1470:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

Dollar is back on growth track thanks to hawkish NFP, possible upside surprise in January CPI

The surprisingly strong NFP report for January markedly eased pressure on the dollar as it reminded that the Fed is likely to lead a hawkish policy reassessment by the central banks of major economies. After release of the report, the two-year US bond yield surged by 9 bp to 1.3%, indicating that the report made a strong impression on the market, in particular due to low expectations after gloomy ADP print:

The strong labor market report also lifted the chances of a 50bp rate hike by the Fed from 8.5% to 32.7%:

Speaking about which currencies are more vulnerable to declines against the dollar than the rest in the current central bank tightening environment, it’s reasonable to focus on JPY and CHF. Central banks here are the least likely to react to inflation-related developments due to the long period of deflation and the fear of reacting too soon, breaking off the desired trend.

The euro suddenly gained more resilience as the ECB took a big step towards tightening policy last week, after which short-term rates shot up (yield on 2-year German Bunds from 0.05% to 0.25%) due to which demand for cash rose. Over the weekend, the comments of the ECB official Knot turned out to be interesting, as they can shed light on the fate of EURUSD in the medium term. He said that it is possible to see ECB rate hike by 25 bp in October followed by increment hikes of 25 bp.

The underlying market expectation after the ECB meeting is now the outcome, where the central bank will be raising rates by 10 bp starting from July. In addition, Knot said that inflation in the Eurozone is mainly generated by fuel prices, while in the US it is the result of rising consumption; it follows that the tightening cycle in the US may be more pronounced than in Europe. Therefore, we can assume that the breakdown of EURUSD towards 1.15 most likely will fizzle out soon and the price may soon look for reversal points. Sell-off in USD pairs, including EURUSD, may resume this week, in particular after the release of CPI in the US for January. Strong growth should increase the chances of a 50 bp Fed rate hike in March, which, in fact, is now the main potential driver for the recovery of the dollar.

EURUSD is likely to test support at 1.1380 ahead of the CPI report, as the chances of a positive surprise in the data are high, especially in light of January's wage growth picking up to 0.7%, as shown in the NFP report.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

US CPI will likely surprise on the upside due to labor market imbalances


On Wednesday, sellers in the sovereign debt markets take profits before release of the key inflation data point for the market (US CPI), yields pulled back from key resistance levels (2% on 10-year Treasuries, 0.25% on German Bunds). Another driver of the rally could be acknowledgment, that there was an overreaction to the ECB and Fed meetings and actual pace of policy tightening could be slower. At the same time, demand for risk appears to be on the mend, European indices and futures for US indices rose, yield search puts constraint on early dollar rally, DXY continues to consolidate around 95.50 ahead of CPI print tomorrow:

Tomorrow's US CPI for January will decide the fate of the Fed's March rate hike by 50 bp (either make it a baseline scenario, or lower the chances). The report will be critical to answering the question of whether the Treasury sell-off continues and whether the 10-year rate goes beyond 2%, which could trigger a breakout move, as there was initial test of 2% key resistance zone yesterday.

Even with consensus of 7.3% in headline inflation and 5.9% in core inflation, there is some room for a surprise on the upside, primarily due to strong wage growth due to ongoing labor market imbalances (0.7% MoM in January vs. 0.5% expected). The jobs quit rate in the United States remains at an all-time high together with a significant increase in wages, they fell into a positive feedback loop - the negotiating power is now on the side of workers which is quite unusual:

Today, representatives of the Fed Bowman and Mester will have their say, the focus is on assessing the persistence of pro-inflationary factors in the economy. Fed rate hike by 25 bp already priced in, the chance of 50 bp outcome is approximately 25%. The ECB releases winter forecasts for growth and inflation today, markets are focused on inflation estimates in 2023, since the ECB is expected lift-off the rate next year. The euro is likely to react positively to the report if the inflation estimate will be above 2%. Also, today there will be a QA session with ECB official Schnabel, who was one of the first to start sounding the alarm about inflation and will probably try to draw attention to this issue again.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

Despite major escalation markets are still reluctant to price in major spillover effects from Ukraine conflict

As geopolitical tensions increased sharply on Monday, policy tightening cycles of central banks and inflation challenges have been pushed deeper on the sidelines. The focus remains entirely on military operations in Ukraine, as well as the sanctions war between the West and Russia. The third package of EU sanctions, including financial, transport, technological, export and other restrictions, caused panic in the Russian currency market on Monday, which led to collapse of the ruble by more than 20% in the first two hours of the trading session. The Russian Central Bank raised interest rate to 20%, effectively limiting speculative pressure on the currency, carried out currency interventions for $1 billion, temporarily banned brokers from executing orders to sell securities from foreign investors, which caused the latter to panic. ADRs of Russian companies traded on the London Stock Exchange plunged 50-60%. Russian currency devaluation was apparently brought under control later in the session, at least partially. The stock market section of the Moscow Exchange is closed today.

Representatives of the Russian Federation and Ukraine sat down at the negotiating table in Belarus, but the chances of a peace agreement that would suit both sides are small. The Ukrainian authorities probably believe that the growing support of the West, primarily in the form of arms supplies, sanctions pressure, as well as reception of refugees, has significantly improved their negotiating position (than, for example, at the beginning of last week), due to the fact that Moscow receives a signal that Kyiv may be ready for a protracted conflict, while at the same time the original goals of the Russian intervention, steep price of the military campaign (primarily large economic costs), makes serious concessions for Russia unlikely.

However, de-risking in global asset markets, despite the risks of an even more escalation, remains quite contained. Greenback rose as US investors flew European asset markets and safe heaven demand increased in general. European stock indices traded moderately in red. Sovereign debt yields rebounded after falling early in the session. This suggests that there is no panic that the local risk will become a trigger for global recession, at least for now:

Gold posted moderate gains as well, which once again underscores the fact that investors are in no hurry to take Ukraine conflict beyond the scope of local risk:

Oil quotes showed mixed performance, financial sanctions against the Russian Federation have led to the fact that the price differential between Russian Urals with world oil benchmarks has widened, which indicates less market appetite for Russian grade of oil. An important event for the market will be OPEC+ meeting on March 2, where output policy for April will be discussed. The key uncertainty is whether OPEC+ will increase production faster, trying to avail of higher prices, or stick to the schedule. For Russia, it should be tempting to continue pushing oil prices up, urging OPEC to gradually hike output, as this will in some way act as a response to Western sanctions in the form of higher risks of cost-push inflation for Western economies. Therefore, the risks for oil prices, without taking into account possible de-escalation of the conflict in Ukraine, appears to be skewed towards further rally.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[tickmill-news]

Despite major escalation markets are still reluctant to price in major spillover effects from Ukraine conflict

As geopolitical tensions increased sharply on Monday, policy tightening cycles of central banks and inflation challenges have been pushed deeper on the sidelines. The focus remains entirely on military operations in Ukraine, as well as the sanctions war between the West and Russia. The third package of EU sanctions, including financial, transport, technological, export and other restrictions, caused panic in the Russian currency market on Monday, which led to collapse of the ruble by more than 20% in the first two hours of the trading session. The Russian Central Bank raised interest rate to 20%, effectively limiting speculative pressure on the currency, carried out currency interventions for $1 billion, temporarily banned brokers from executing orders to sell securities from foreign investors, which caused the latter to panic. ADRs of Russian companies traded on the London Stock Exchange plunged 50-60%. Russian currency devaluation was apparently brought under control later in the session, at least partially. The stock market section of the Moscow Exchange is closed today.

Representatives of the Russian Federation and Ukraine sat down at the negotiating table in Belarus, but the chances of a peace agreement that would suit both sides are small. The Ukrainian authorities probably believe that the growing support of the West, primarily in the form of arms supplies, sanctions pressure, as well as reception of refugees, has significantly improved their negotiating position (than, for example, at the beginning of last week), due to the fact that Moscow receives a signal that Kyiv may be ready for a protracted conflict, while at the same time the original goals of the Russian intervention, steep price of the military campaign (primarily large economic costs), makes serious concessions for Russia unlikely.

However, de-risking in global asset markets, despite the risks of an even more escalation, remains quite contained. Greenback rose as US investors flew European asset markets and safe heaven demand increased in general. European stock indices traded moderately in red. Sovereign debt yields rebounded after falling early in the session. This suggests that there is no panic that the local risk will become a trigger for global recession, at least for now:

Gold posted moderate gains as well, which once again underscores the fact that investors are in no hurry to take Ukraine conflict beyond the scope of local risk:

Oil quotes showed mixed performance, financial sanctions against the Russian Federation have led to the fact that the price differential between Russian Urals with world oil benchmarks has widened, which indicates less market appetite for Russian grade of oil. An important event for the market will be OPEC+ meeting on March 2, where output policy for April will be discussed. The key uncertainty is whether OPEC+ will increase production faster, trying to avail of higher prices, or stick to the schedule. For Russia, it should be tempting to continue pushing oil prices up, urging OPEC to gradually hike output, as this will in some way act as a response to Western sanctions in the form of higher risks of cost-push inflation for Western economies. Therefore, the risks for oil prices, without taking into account possible de-escalation of the conflict in Ukraine, appears to be skewed towards further rally.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.