Stock markets across Europe are rallying on Tuesday, buoyed by positive noises coming from Turkey where Ukraine and Russia may be nearing a ceasefire agreement.
While there are reportedly still plenty of gaps in the demands of the two teams, there appear to have been compromises found on some big issues including Ukraine’s previous ambitions of NATO membership. The next couple of days could be crucial but the signs are promising which we’re seeing reflected in the markets today.
There has been no shortage of optimism in the markets since the talks began, which has looked premature at times but may now be paying off. Europe is up around 2% and US futures are making small gains also, a reflection of how much more exposed the bloc is to the invasion and the knock-on effects of a prolonged war.
Sanctions have sought to wreak havoc on the Russian economy while shielding oil and gas, which Europe is heavily reliant on, but as the war has intensified, talk of weaponising this mutually dependent relationship has increased. This is still being rejected by those most exposed in Europe but the longer the war rages, the more likely it is that their position will change.
Russian demands to pay for gas in roubles may effectively take both sides down the same path though. The G7 has fiercely rejected Kremlin demands for unfriendly nations to settle in roubles and believe the contracts are in their favour. It’s not clear how the Kremlin plans to enforce such a demand but if neither side blinks, it could have massive consequences for all concerned.
BoJ continues to push back against YCC challenges
There remains a massive focus on rising yields and the impact on the US yield curve in particular. Flashing recession signals are the last thing we need right now but some are sounding the alarm as parts of the curve invert. The Fed, as ever, doesn’t appear particularly concerned but further inversions may change that at which point a more cautious approach may be considered.
One consequence of global yields (and inflation) rising as aggressively as they have is being seen in Japan, where BoJ’s yield curve control policy is being tested. The central bank is buying unlimited bonds at 0.25% in an attempt to protect the cap but with limited success so far.
The yen has come under heavy pressure again as a result of the BoJ purchases, prompting speculation that currency interventions may be warranted due to the risks of rapid depreciation. Or, of course, a tweak to the YCC policy allowing more flexibility as the market pushes back against the current limits. The yen is paring losses today.
Oil higher as political OPEC+ prepares to continue gradual output increases
Oil prices are a little higher today, slightly paring heavy losses on Monday sustained on the back of intensifying lockdowns in China. The country remains committed to its zero-Covid policy which will ultimately weigh on crude demand in the near term. No doubt it comes at a good time given current supply/demand dynamics but we’re only talking short-term relief.
Longer-term pressures remain and OPEC+ looks unlikely to do anything to alleviate those this week. The group has repeatedly stated its desire to remain apolitical and base its decisions purely on achieving a balanced market. Given how unbalanced the market is and the fact that at the center of the alliance is the country to blame for the most recent surge in oil prices, it’s hard to view a decision to not increase output targets as anything but political.
Gold eases further as risk appetite improves
Gold prices are easing again as risk appetite improves on reported progress in talks between Ukraine and Russia. The yellow metal was in strong demand as Russian troops crossed the border and hope of a ceasefire is seeing that unwind. There will remain a certain amount of support for gold still given the inflationary, geopolitical, and risk environment but we could see it ease a little further in the near term. The next key level for gold will be $1,900 where it saw strong support earlier this month.
Bitcoin pares gains after smashing resistance
Bitcoin is paring gains today after breaking free at the start of the week. It finally broke through $45,500 resistance and it just took off from there, peaking just above $48,000. The outlook is suddenly looking far more promising after a long period of consolidation, with the next tests coming at around $50,000 and $52,000.
