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Monday, March 27, 2023

Oil prices head higher amid risk of imminent Ukraine-Russia conflict

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Market movers today

The tense situation between Russia, Ukraine and the West remains a key focus for markets, as German chancellor Olaf Scholz travles to Kyiv today and meets president Putin in Moscow tomorrow.

While there are no economic releases of significance in the euro-area today, ECB President Lagarde is scheduled to speak late in the day.

Given the high inflation pressures in the US, Fed speakers this week will be in focus, starting with Barkin Today. Key focus this week is also US retail sales and minutes of the January Fed meeting on Wednesday. 

The 60 second overview

Russia-West stand-off intensifies again: On Friday the US lead the way in warning a conflict is coming to Ukraine advising all non-essential staff to leave the country. This was followed by other western countries over the weekend. It remains quite unclear as to what is geopolitical grandeur and what is reality on both sides of the conflict. In addition, politicians across EU and US have had calls with president Putin – generally without appearance of progress. Following the increasing concerns about an imminent conflict, EUR/RUB went higher together with oil prices and EUR/USD lower. Needless to say, if conflict becomes public and evident, there will be a substantial sell-off in RUB and we think the news flow since Friday does suggest an escalation of the risk premium embedded in RUB.

Growing pressure on Fed to take action: This morning we published a new Fed call in light of the strong inflation print last week together with very hawkish comments from Fed governor James Bullard. We now expect the Fed to deliver 200bp rate hikes this year (versus 125bp previously). We expect the Fed to hike by 50bp in March and 25bp on each of the following six meetings. If so, the Fed funds target range should be 2.00-2.25% by the end of the year. The door is open to an emergency rate hike before the March meeting (like on 18 April 1994), but it is not our base case, as it is very rare. We would not be surprised if the Fed announces it ends QE immediately although it did not happen over the weekend. Fed Update – We expect a total of 200bp rate hikes this year starting with 50bp in March, 14 February.

Equities: Risk-off in Friday markets as investors digested inflation, the new Fed route, weakening consumer spending – topped with increased geopolitical tension. While the latter is usually ignored by the market, the escalation comes at a time when least resistance has shifted. Hence, geopolitics can get more air time than usual in the coming weeks – particularly if the oil price continues to surge. Defensives outperformed cyclicals by roughly 2pp in the US session, while the distinction between value vs growth was less pronounced. All sectors lower, except energy on the booming oil prices. VIX rose just south of 30, while S&P closed down -1.9% and just off the lows in January. Nasdaq -2.8%, Russell 2000 -1% and Dow -1.4%. Asian markets are following the move lower this morning, while US futures have turned positive.

FI: Relative to the price movements early last week, the European session saw more modest price moves on Friday. Bunds ended broadly unchanged on the day at 0.29%, while the rest of EGB space underperformed Germany. Unsurprisingly Italy was the weakest performance with now 166bp spreads to Bunds (10y), although Friday’s Italian supply probably did not make the situation better. However, the biggest moves were observed by the US markets, where the 10y UST yield dropped more than 10bp late in the session, on headline of geopolitical concerns and military action possible relatively soon.

FX: The end to last week in FX markets was characterised by rising geopolitical risk (Russia) and speculations of a potential in-between-meetings policy announcement from the Federal Reserve. While oil prices rose on higher geopolitical risk, commodity (and risk) sensitive currencies followed RUB lower with the Russian currency being the clear underperformer among majors. USD/RUB moved back above the 76-figure while EUR/USD has moved below 1.1350. In the Scandies, EUR/NOK is trading at 10.05 while EUR/SEK is trading just below 10.60.

Credit: CDS indices were under severe pressure on Friday where iTraxx Xover widened 12bp and Main 2.3bp. Cash bonds were more stable and HY bonds widened 3bp while IG was unchanged.


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