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Markets look to price peak-Ukraine


The New York session once again saw a sharp reversal of fortunes, reversing the post-weekend Russia sanctions sell-off. Oil, the US dollar, and gold fell, while equities stage an uneven comeback. The power of buy-the-dip is an irresistible force in equity markets still, and it appears the street will look for any excuse to justify jumping back in. The fall in US yields over the entire curve on investor haven flows may have jolted that process along.

Yesterday, the meeting between Ukrainian and Russian officials on the Belarus border was inconclusive, but they agreed to meet again. That was enough for the street to try and price in peak-Ukraine. Markets may well feel that the worst of the bad news is now out there, especially on the sanctions front. I am not so sure of that, but the market is always right, and we have to respect the momentum from a short-term perspective.

Interestingly, bitcoin staged a near 15% rally overnight, and I am guessing traders are pricing in the cryptos will become an alternative to roubles as Russian citizens desperately remove their money from local banks and switch it into any alternative they can get their hands on. I would have expected this trade to appear much sooner, but the European and US SWIFT announcements and the freezing of central bank and oligarch assets appear to have finally set that ball rolling.

Asian equity markets are off to a strong start as well as bargain hunters emerge in force, a rerun of the second half of last week’s price action. This is telling; it shows that there is still plenty of money on the sidelines waiting to get back in if, indeed, peak-Ukraine has arrived. It is equally likely though, we see another panicked rush for the door is a stream of negative headlines, a breakdown in Ukraine-Russia talks for example, or widespread use by Russia of thermobaric explosives, starts hitting the wires.

PMIs boost Asian markets

Sentiment has been aided in Asia today by data out of China. The official manufacturing and non-manufacturing February PMIs outperformed, as did the private Caixin Manufacturing PMI survey. That alleviated fears of a China slowdown and has displaced property sector nerves off the front page for now. That may not last though with a heavy schedule of bond and trust payments due from Chinese developers over March.

Elsewhere, a slew of Manufacturing PMIs from across ASEAN held their own or outperformed as well, suggesting that regional economies have weathered the omicron storm. Driving around in Jakarta this weekend, traffic looks back to pre-pandemic levels, despite the high number of cases. Peak-virus will offset the troubles in Eastern Europe to some extent for Asia, but it means the inflation question has not gone away. If anything, it implies inflation will become more worrisome and entrenched. Be careful getting too bullish on equities;, if the Ukraine situation doesn’t cause central banks to lose their nerves, we have a lot of monetary tightening coming.

One central bank fighting that narrative for now is the Reserve Bank of Australia. It left rates unchanged at record lows of 0.10% this morning, citing Ukraine’s uncertainty and sub-target wages growth. The latter is the last part of a three-part puzzle for the RBA, which includes inflation and growth. I expect the RBA to throw in the towel on holding rates steady in the next month or two; that’s certainly what the Australian bond market is pricing.

Eurozone inflation data this week won’t capture any Ukraine-derived spikes, but it seems almost certain to be on its way. Whether that is dismissed as a one-off by the ECB remains to be seen. High prints may force their hand into more rate hike clarity anyway. The Bank of Canada will almost certainly hike by 25bps this week. That leaves us with the US where ISM Manufacturing is released today, ADP Employment tomorrow, and then US Non-Farm Payrolls on Friday. A strong set of prints should lock and load 25bps from the FOMC this month. Jerome Powell’s two-day testimony on the Hill from tomorrow may give us some hints about just how far behind the curve the Fed believes it now is. As I earlier, price in peak-Ukraine if you wish, but the world’s central banks mean you probably shouldn’t fall in love with that trade in 2022.


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