Under the bus

Nobody could complain about a lack of volatility overnight as the Russia/Ukraine sell-off staged the mother of all reversals, in equity markets anyway. Oil also reversed almost all its early session gains and gold finished lower on the day. Industrial metal and grain prices remained elevated with their more direct correlation to Ukraine, and currency markets staged only a partial reversal.

Markets rally as sanctions remain limited

The stunning reversal by US equity markets and gold, and to a lesser extent, oil is telling. The new round of sanctions announced by the US, Europe and the UK amongst others was notable for two things. Firstly, in President Biden’s own words, the mechanisms were there for energy exports to continue. Secondly, the Europeans baulked at shutting Russia out of SWIFT, the global interbank payments network. President Biden also made great store out of an impending global strategic petroleum reserve release.


So, the limits to the economic pain that the “West” was prepared to tolerate to support Ukraine and punish Russia have been revealed within 24 hours of Russia’s offensive beginning. Timing is everything, and the Russian offensive has occurred in a time of already high inflation and commodity shortages globally, and the West has blinked immediately. The process of throwing Ukraine under the geopolitical bus has begun. Markets clearly felt the same way, that this is the worst it can get, and have responded in kind. Thereafter, the power of buy-the-dip proved irresistible.


I will, of course, have to revisit my stagflationary shock thesis, much to the relief of many readers, but not today. I will revisit it over the weekend, although I expect industrial metal and more worryingly, food prices, to remain elevated due to the conflict and Ukraine’s role as a food producer. My initial thoughts are that it will cause a stagflationary wave, but not a shock.


The West’s capitulation also allows the world’s central banks to breathe a sigh of relief and should not now stop them from continuing the monetary normalisation path unless things materially change in Eastern Europe. With that in mind, although equities will now stage a “Ukraine under the bus” rally over the next few days, I am not getting too excited that a medium-term bottom has occurred. The global denial that the cost of capital is no longer zero still pervades global markets. That acceptance of reality will cause pain in the months to come, particularly once the Fed starts getting busy with rate hikes. The Nasdaq staged a truly spectacular comeback overnight, with the gnomes of Wall Street also convincing themselves that technology was a non-Russia-correlated haven play, you have to love group-think. That is likely to continue for a few sessions yet, but the Federal Reserve will serve up a cold dose of reality to those rich valuations in March.


Overnight, US data came in on expectations with GDP QoQ Q4 printing at 7.0%, New Home Sales rising by 801,000, PCE Prices rising 6.30% and Initial Jobless Claims coming in at 232,000. That further boosted sentiment on Wall Street as the picture painted suggested that the US economy continues to perform strongly, omicron or not.


This morning, New Zealand’s Balance of Trade missed slightly at NZD -1.082 billion, but the headline masked massive misses in both exports and imports. Q4 Retail Sales staged an Auckland reopening bounce, rising by 8.60%. With higher mortgage rates already starting to bite, and a central bank so far behind the curve, it can’t be seen, New Zealand is quickly rising to the top of my hard landing list.


Japan’s Tokyo CPI rose just 0.50% YoY for Feb, just above expectations. A dovish Bank of Japan will be relieved as the need to think about some sort of monetary policy normalisation for the first time in 20 years remains distant, with the inflationary pressures rampant internationally, relatively absent domestically. The data should be supportive for USD/JPY going forward as Japanese investors hunt for yields offshore.


The data is mostly second-tier in Europe today, but the US releases Personal Income and Spending for January, and the PCE Index, along with Durable Goods. The former are closely watched by the Fed, so high prints are likely to crank up the 0.50% hiking air raid siren again for the March FOMC meeting. In this environment, that overnight equity rally may run into a few headwinds at the end of the week. As it is I suspect investors will be reluctant to go into this weekend loaded up on risk.


Next week brings the usual tier-1 first-week-of-the-month data frenzy from across the US, China, and the rest of the world. But first, let’s get through this weekend and we will talk about it on Monday.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is OANDA’s senior market analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV, Channel News Asia as well as in leading print publications including the New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

Latest posts by Jeffrey Halley (see all)