Putin recognises breakaway regions
The clutching at straws rally we saw in Asian and early European hours yesterday quickly came to an end as Russian President Vladimir Putin quashed any certainty over a US summit regarding Ukraine. He followed that up by recognising the two Ukrainian separatist regions of Donetsk and Luhansk as sovereign states. Reports are now coming in of an immediate launch of “security operations” by Russia in those areas, which I assume to mean lots of Russian military equipment rolling into the area or taking off the covers of the stuff that was already in place.
An emergency meeting of the UN security council today will likely be a toothless affair, given that Russia and China are permanent members. Europe and the US have indicated that new sanctions are on the way while being very light with detail. The Russian rouble and Russian stocks tumbled, and the news quickly reversed the incipient rally in European equity markets.
With US markets on holiday, the fallout in currency markets was modest, although the US dollar did rise generally, and US bond futures rose, indicating haven buying. Gold was a natural winner while oil prices exploded higher in holiday-thinned liquidity. Cryptocurrencies “haven status” appears to have vanished as quickly as the pandemic bull market, but it was equity markets that felt the brunt of the latest Ukraine developments. US index futures have tumbled with their European equivalents and Asia is unlikely to take the news well either.
Asian markets are further complicated by rumours of a new big-tech crackdown swirling around mainland China this week, forcing denials from Tencent. There is a wall of China property developer debt and rollover decisions due this week as well, both onshore and offshore instruments. Additionally, Fed Governor Michelle Bowman kept her cards close to her chest regarding a potential 50 basis point hike by the FOMC in March, although if the Ukraine situation deteriorates, I fully expect the Fed to hit the big red wimp button and remain unmoved.
We also have rate decisions from the Bank of Korea Thursday and the Reserve Bank of New Zealand tomorrow. The BOK will likely hold fast while the RBNZ will hike by at least 0.25% and signal a slew of hikes ahead. Given their culpability in creating the overheated mess in New Zealand right now, they should really go 0.50%, but I err to mediocrity and not meritocracy with the RBNZ these days. Any reaction to a 0.25% hike by the New Zealand dollar is likely to be limited, as the country is still on the omicron ascendant phase with serious cracks appearing in the government’s playbook.
Indeed, a full-scale invasion of Ukraine by Russia will leave many central banks with itchy hiking trigger fingers in a quandary. The immediate impact would be an exacerbation of the rampant inflationary pressures globally as oil hits USD 130.00+ a barrel. But the inevitable slump by equity markets and high-yield bond markets, just as credit is tightening around the world will probably have them, along with the Fed, hitting the pause button on tightening, and even perhaps unwinding forward guidance. Volatility will continue to be the winner, as will the US dollar and gold, and global stagflation could be the fait accompli for some time to come.
We also have Japan trade, China CPI and Australian Employment this week, as well as US Durable Goods and Personal Income/Spending, along with the US and Eurozone GDPs. It really should be a very interesting week and a positive one as pandemic restrictions are eased or unwound by the day by countries around the world.
Alas, none of this will matter as market direction and volatility will be entirely driven by developments surrounding Eastern Europe. Another day, another, exclusively male, national leader sowing chaos for his own selfish ends. I really do believe the world should bar men from running any country for the next 20 years. If you do what you’ve always done, you get what you’ve always got.
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