Equities rebound after new sanctions on Russia
Equity markets in New York recovered some of their losses overnight, and markets in Asia are cautiously higher after the US and Europe imposed new sanctions on Russia after it formally recognised two breakaway provinces of the Ukraine and started moving peacekeeping military equipment into them. Markets though, breathed a sigh of relief that the sanctions were not more sweeping and aggressive, allowing oil, the US dollar and gold to ease slightly, while risk sentiment currencies rallied, and equities staged some sort of dead cat bounce.
Perhaps the most significant move was from Germany, the most fence-sitting member of the “Western” alliance if one wishes to describe it as such. Germany halted the Nord Stream 2 pipeline project, although now that it is fully built, it does have a free option in the future. Nothing can disguise that Europe’s strategic NIMBY-ism ineptitude in tying their energy reliance to Russia leaves the bloc woefully exposed to further escalations. The unfortunate fact of the transition to renewable energy is that energy storage technology lags behind renewable generating technology badly. Shutting down nuclear and outsourcing your energy needs to unreliable partners out East, be it plastic recycling, energy, or rare earth elements, keeps the tree-huggers happy over their kombucha teas, but leaves you strategically exposed when the flag goes up. As long as this crisis lasts, I will struggle to be structurally bullish on the euro or Europe.
It appears that the US, Europe and others are adopting an incremental sanction strategy intended to leave President Putin a diplomatic off-ramp along the way. Markets will likely bubble along sideways now until we see Mr Putin’s next move. But I have no doubt that Russia/Ukraine still have the potential to deliver a stagflationary shock to the rest of the world if it escalates and oil prices spike to above USD 130.00 a barrel. That would leave many central banks having to push the W for Wimp button and halt monetary normalisation just as inflationary pressures intensified sharply.
Moving out of the world of geriatric autocrat power plays, life still goes on. Germany’s IFO data ignored Ukraine nerves and impressively outperformed, as did the US Markit Manufacturing and Services PMIs. The US House Price Index rose modestly by 1.20% although the Richmond Fed Manufacturing Index fell while Services jumped. In totality, you would have to say that both Europe and the US are moving past omicron disruptions and that the recovery remains on track, as would monetary normalisation, from the Federal Reserve anyway.
In Asia, Japanese markets are closed for the Emperor’s birthday. Elsewhere, Australian wage growth climbed by 2.30%, below the RBA’s 3.0% target. That likely allows them to remain on hold for at least one more meeting. The RBNZ though did hike this morning, adding 0.25% to bring the reference rate to 1.0%. The RBNZ said the economy was growing at unsustainable rates and that unemployment was unsustainably low. Their interest rate projections into next year suggest that every meeting going forward this year will feature a 0.25% hike. Before we load up on New Zealand dollars though, the RBNZ has managed to engineer an economy with Norway prices, above full employment, but without Norway wages. That takes a special talent, and I am unsure if the RBNZ can engineer a soft landing for New Zealand’s economy, and I’m being polite.
Thailand releases its Balance of Trade shortly, and that may provide some good news for the baht, which has been thoroughly EM/Ukraine’d this week. The reopening of borders should see tourism accelerate propping up the trade balance. Singapore’s core inflation YoY for January is expected to rise slightly to 2.50%, impressive by world standards right now. A higher print will increase the noise around the MAS tightening policy once again, although as the ultimate trading nation, they will look at Eastern Europe with more taut nerves than most.
Meanwhile, China markets remain under pressure as rumours of a new tech crackdown just won’t go away. Property sector rollovers will gather pace in the second half of the week bringing a serious problem pushed off the front page, back to it potentially. Future tax cut announcements have failed to lift animal spirits in mainland China. Hong Kong’s budget today, as the entire population prepares to get swabbed, is likely to see an equally anaemic reaction.
Eurozone inflation data is released this afternoon with the headline expected to remain above 5.0%. Expect more transitory rhetoric. The US has a quiet calendar although a Fed speaker or two, or noise from the White House could spark some intra-day volatility. Interestingly, although equities clutched at sanction straws and currencies remained steady, metal and agricultural prices surged higher and stayed there. That’s as good a sign as any that the Ukraine situation remains the primary driver of market direction and volatility despite my best efforts to distract you over the last few paragraphs. Ironically, it is a Russian holiday today. Defence of the Fatherland Day…
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