The sell-off is on hold on Wednesday as investors regroup following another big move lower a day earlier.
European stocks are paring gains and the US has kicked things off in a similar fashion with energy naturally leading the way. I’m not sure broader market sentiment has improved in any way since yesterday given the intensification of the invasion of Ukraine and soaring oil prices but equity markets are seeing some reprieve.
There is mild hope that talks between the Ukrainian and Russian delegates can make some headway but I wouldn’t go as far as to say there’s optimism. The gulf between the demands of the two countries is enormous and the actions being taken by Russia in the midst of the negotiations are utterly horrific. Not exactly the foundations for a compromise.
The sanctions being imposed by the West are no doubt having an effect though and Russia is becoming increasingly isolated from much of the rest of the world. The combination of severe sanctions and public outrage is resulting in a corporate backlash against Russia which will compound the pain for the economy and the Kremlin.
Record euro area inflation ahead of ECB next week
It’s so easy to forget this week just how busy the normal calendar is and how impactful that would typically be for the markets. This morning we’ve seen euro area inflation hit another all-time high in February, once again topping expectations and nudging yields higher across the bloc.
The situation in Ukraine throws another spanner in the works for central banks at a time when the job of reining in inflation while not derailing the recovery from the pandemic was already proving challenging enough. Soaring energy prices and other unintended consequences of Russian sanctions could make life a lot harder again.
Nothing new from Powell and unreliable ADP beats expectations
Powell’s testimony to the House Financial Services Committee contained no surprises, with the Fed Chair highlighting the risks to the economy from inflation, the likelihood of an increase at the next meeting followed shortly after by balance sheet reduction, and finally, the uncertainty around the invasion of Ukraine. All in all, we’ve learned nothing.
The ADP data gets minimal attention these days and the revision to last month’s number highlights why. Job growth in February was 475,000, almost 100,000 higher than anticipated while last month was revised up from -301,000 to +509,000. It makes it hard to read too much into the data, especially ahead of Friday’s jobs report and against the current backdrop.
OPEC+ displays little appetite for lower prices
Oil prices are surging once again today and have topped $110 as reports of disruptions to Russian exports as a result of the sanctions emerge. This is something that was already being priced into the markets prior to and after the invasion and the severity of the sanctions have justified those moves. As the details of the sanctions become clear, some of those issues may be resolved considering they have been designed to disrupt flows as little as possible, but they will continue to be impacted.
And at a time when the market is already extremely tight, something OPEC+ still seems unwilling to acknowledge after leaving planned increases unchanged again in April. Not that this matters enormously as they’re missing those targets by an increased margin each month so what reason is there to believe that increasing it would dramatically impact that? Unless certain members utilize some of that spare capacity.
Gold pares gains but has $2,000 in its sights
Gold is pulling back again on Wednesday after peaking at around $1,950 on Tuesday in risk-averse trade. It’s off less than 1% so far today but the trend remains very much in place. Inflation and risk-aversion are the perfect environments for the yellow metal and we’re seeing plenty of both at the moment, which is unlikely to change.
The question is how far it can go. Ultimately, that will depend on how long the invasion of Ukraine lasts and how severe the sanctions against Russia become. At the moment, it’s looking like a case of when it will hit $2,000 rather than if but a sudden and unexpected ceasefire would surely change that. One can only hope.
Bitcoin extends gains
Bitcoin is making strides higher for a third day as the crisis in Ukraine and Russian sanctions present an opportunity for cryptocurrencies to show their worth. Whether that’s through positive means such as donations to the Ukrainian defence efforts or preservation of capital for ordinary Russians – a rare exception when it could be argued that crypto can be a relative store of value – or something more sordid such as subverting sanctions. Cryptos are displaying a use-case in recent days and that’s being reflected in the price, both from related demand and no doubt speculation on the back of it.