The more things change…..

The more things change, the more things stay the same. That harsh reality was dished out in spades to markets trying to price in “Peak Ukraine” by buying the dip yesterday. That light at the end of the tunnel turned out to be the train coming the other way. An apparent change of tactics by Russia in Ukraine towards wholesale urban destruction, and a procession of giant Western companies announcing exits from Russia eroded sentiment, as did the slowly dawning reality that the world outside of Russia will also endure economic pain as the price of Russia’s invasion of Ukraine.

All of that equals an inflationary wave and supply chain disruption set to wash once again across the world economy. As opposed to anytime else this century, it will occur in an already inflationary environment caused by the global Covid-19 pandemic. Oil and energy were perhaps the biggest drivers though, with crude prices spiking once again. The International Energy Administration announcement of a strategic reserve release of 60 million barrels was swept aside as what it was, window dressing. Additionally, talk emerging from the OPEC+ meeting being held at the moment seems to indicate that the grouping will not look to increase production above its previously agreed schedule.

Oil surges as market fears escalate

Oil prices leapt nearly 10% higher overnight and have jumped another 3.0% in Asia this morning and there is definitely a sense of fear in the air. Asia, of course, is acutely sensitive to higher energy prices, most of Asia being huge net energy importers. But disruptions to Russian metals exports and most certainly, Ukrainian food exports, are quickly combining to create a perfect storm in financial markets. I am still not ruling out a stagflationary shock to the world as the price it pays to bring Russia to heel.

Government bond yields are in full retreat now and not all of it can be attributed to haven flows out of equity and other asset classes. Bond markets appear to be pricing in that the Ukraine situation will be enough for central banks to postpone the normalisation path for interest rates. Certainly, countries such as India and the Philippines have been doing just this as growth suffered and inflation exploded due to the pandemic. There are no good choices for central banks in these environments, which makes this month’s Federal Reserve FOMC decision all the more important. If the Fed blinks, we can assume the rest of the world will as well. Equity markets will remain challenged in this environment.

One man’s loss is another man’s gain and if I were to look at the Asia Pacific, three names pop up as potential winners. Australia of course, is a massive energy, industrial ore, and agricultural exporter. Not for nothing is it known as the lucky country. Malaysia with oil and palm oil. But the big winner could be Indonesia with palm oil, metals, coal and oil and gas. Malaysia and especially Indonesia, have been in the too hard basket for international energy companies for well over a decade. The world will be scrambling for new sources of energy now, and Indonesia has lots of that and other stuff the world needs. To be sure though, Indonesia is very much in the “value-added” side of the equation and if the world comes calling, they will be expected to be building a lot of tertiary refining and processing infrastructure now. We can expect phones to be ringing in many parts of Africa right now as well.

Switching to US President Biden’s State of the Union address, which I usually try to avoid, no matter who the President is. I find watching it tiring as politicians jump up and down constantly to clap, like an aerobics class gone wrong. He lost a big part of the audience early on gun control, but one thing stuck out to me, children and social media. President Biden was vociferous in his condemnation of social media giants and their targeting of children and wanted to “bring them to heel.” I have always believed that big tech would face a Standard Oil moment, and this may be the start of it. You can guarantee it will have bi-partisan support as well. Meta, Alphabet and Twitter may be less FAANG and more door-MAT when they open for trading this evening.

Back in the real world, data releases in Asia, although light, have been mostly positive. South Korean data was with Construction and Industrial Production rising by 6.80% and 4.0% YoY respectively in January, while Manufacturing YOY grew by 4.40%, with Retail Sales slowing MoM by -0.20%. Some omicron effects appear to be in that data, but overall South Korea’s economy remains robust with most attention on the impending Presidential election.

Australian Q4 GDP outperformed, rising 3.40% QoQ, and by 4.20% YoY, consumption rising by 4.20% YoY, and only capital expenditure letting the team down, falling by 1.50% in Q4. Australia has shrugged off omicron and its rapid border reopening should maintain momentum into 2022, with the terrible flooding likely to lead to a further reconstruction boom this year. It is well placed to benefit from the world’s Russian woes as well, even if domestic inflation also explodes. The lucky country remains as lucky as ever.

Looking ahead, Eurozone Inflation will likely print at near 5.50%, especially with national indicators on the high side overnight. With developments in the markets elsewhere, upside risks persist and will likely be, yet another drag on Eurozone equities.  The US releases ADP Employment which will be used to extrapolate this Friday’s Non-Farm Payroll estimates, even though it has been a poor indicator. Federal Reserve Chairman Powell begins two days of testimony on the Hill, with markets hanging on every world for hints of FOMC rate hikes this month, futures have already pulled back from a 0.50% hike. Finally, official US Crude Inventories will have a higher impact than normal after a surprise fall in API Inventories overnight, and with oil prices on fire over Russian supply shocks this morning.

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

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