Weekly Recap – 21-25 February

Unless Moscow rolls back Russian troops shortly, which still seems doubtful, risk-on appetite in markets is believed not to continue for longer.

Speculations tend to support the view that Russia’s invasion of Ukraine will slow the planned pace of US Fed’s quantitative tightening which is awaited mid-March.

Investors and consumers are monitoring hot inflation as soaring energy prices remain a persistent concern. Energy prices are up a striking 27% y/y in the CPI basket and contributed 2.5% points alone to the 7.5% y/y January CPI reading. Strong demand and tight supply have sent prices higher in commodities markets.

Volatility spiked all week long as Russia launched a full invasion of Ukraine, and Western countries responded with accelerating sanctions. The direct impact on the U.S. economy and corporate earnings is likely limited.

Trade between the U.S. and Russia is relatively insignificant, and Russia’s economy is only the 11th largest, accounting for less than 2% of global GDP. For perspective, the German economy is almost three times larger, despite having half the population.

Russia is a major commodities producers and exporter. Europe gets nearly 40% of its natural gas and 25% of its oil from Russia. Together with Ukraine, Russia accounts for about a quarter of global wheat exports.

The primary risk is a disruption in the supply of energy and other agricultural commodities, which would cause prices to soar and drive inflation higher for longer.

European Central Bank President Christine Lagarde said on Friday that the central bank stands ready to take whatever action is needed to ensure price stability and financial stability in the Eurozone.

Lagarde said that it would be premature to assess the exact impact of the conflict in Ukraine just yet, but warned that the two main channels for the economy would be via prices and confidence.

Uncertainty is likely to act as a drag on consumption and growth, she continued, adding that optionality and flexibility remain needed. We’ll analyse on March 10 what to do next.

SWIFT
The White House as well as allies; France, Germany, Italy, the UK and Canada, announced Saturday evening that they would expel certain Russian banks from SWIFT, the high-security network that connects thousands of financial institutions around the world, in order to collectively ensure that war is a strategic failure for Putin.

Several Russian banks will be deprived from connection to the international financial system and this will harm their ability to operate globally. This sort of measure will prevent the Russian Central Bank from utilizing international reserves in ways that undermine the impact of Western sanctions.

US and European officials have also discussed targeting the Russian Central Bank with sanctions, according to two people familiar with the talks, a step without precedent for an economy of Russia’s size.

US consumer spending Rose by 2.1% in January and Inflation accelerated amid Omicron wave. Commerce Department’s inflation gauge rose 6.1% from a year earlier.

US consumer spending rose briskly in January and prices climbed faster, adding to other signs that the economy started the year on a solid footing despite the Omicron wave of Covid-19 infections.

But economists warned the conflict in Ukraine could curb growth in the coming months if it leads to higher gasoline prices. Spending rose a seasonally adjusted 2.1% in January from the previous month, rebounding from a revised 0.8% decline in December, the Commerce Department reported Friday.

US shares rose on the last day of the current trading week, despite having been in the red territory since Russian President Vladimir Putin recognized Donetsk and Luhansk separatist regions in Ukraine as independent states. Orders for American durable goods rose by 1.6% last January, compared with a previous reading of 1.2%, which exceeded market expectations by 0.8%.

Oil
Oil had an extremely volatile week, with traders expecting sanctions on Russia, the world’s second-largest exporter after Saudi Arabia, will lower supply. Of course, Russia may punish Europe by no longer sending them oil and gas, but that all remains to be seen right now.

On the other hand, the US’s nuclear negotiations with Iran could cause a return of exports to the global market from that Middle Eastern country.

After jumping far above its pennant, oil prices closed within it. An upside breakout on a closing basis would signal that buyers have absorbed all available supply and are looking for more.

Baker Hughes on Friday reported that the number of active US rigs drilling for oil was up by two to 522 this week.

That followed a climb of 4 oil rigs the week before, Baker Hughes data show. The total active US rig count, which includes those drilling for natural gas, climbed by five to 650, according to Baker Hughes.

Oil prices continued to trade lower in Friday dealings, giving back some of the gains seen in the wake of the Russian invasion of Ukraine. April West Texas Intermediate crude CLJ22, -1.90% was down $2.14, or 2.3%, at $90.67 a barrel on the New York Mercantile Exchange.

Gold
Gold slumped on Friday, but we expect it to continue rallying in the coming week.

Gold has been overbought. Once traders take profits, the symmetrical triangle that started shortly after the yellow metal’s August 2020 record high will turn into support.

Equities
Thursday was a strange day. The S&P 500 went straight down to 4,115 well below support at 4,180 as some observers mentioned on Wednesday, and then went straight back up 4,295. Stock markets in Europe are rebounding strongly Friday, just one day after plunging on the back of Russia’s invasion of Ukraine.

The combination of heightened geopolitical risk, ongoing inflation pressures, and tightening central-banks’ monetary policy pushed equities further into correction territory, declining 12% from their 3 January high before rebounding later in the week.

While the S&P 500 Index jumped over 6% from Thursday’s lows to the close on Friday to end the trading week on an uptrend, the market action over the last two days wasn’t a conventional buying opportunity. The rebound followed a 12% correction since the Jan. 3 record, providing what does indeed look like a buying dip via the give-and-take of supply and demand cycles among freely traded assets.
The S&P 500 is still down 8% since the start of the year, its sharpest selloff since the March 2020, COVID-outbreak plunge, when the index lost a third of its value.

However, any hints from the Fed that they might adopt a wait-and-see approach to rate hikes because of the crisis in Eastern Europe is likely to provide investors willing to look past the noise a reason to take some long-term positions. Traders will be paying close attention to Fed Chief Jerome Powell’s Congressional testimony on Thursday, in search of any language that suggests any geopolitical considerations vis-à-vis monetary policy.

Cryptocurrencies
Bitcoin is up today, trading around $39000. Bitcoin has been crushed at times over the last week, but the improvement markets have seen in risk appetite has given it a big boost. It is now recovering around 15% from yesterday’s lows and is up more than 2% today.

Bitcoin is the ultimate risk asset, and if sentiment remains positive, it may not be long until it recaptures $40,000 and traders will be discussing $45,500 again.

Cryptocurrency analysts say at least $13.7m (£10.2m) has so far been donated to the Ukrainian war effort through anonymous Bitcoin donations.

Researchers at Elliptic, a blockchain analysis company, say the Ukrainian government, NGOs and volunteer groups have raised the money by advertising their Bitcoin wallet addresses online.

More than 4,000 donations have been made so far, with one unknown donor gifting Bitcoin worth $3m to an NGO. The median donation is $95.

On Saturday afternoon, the official Twitter account of the Ukraine government posted a message: “Stand with the people of Ukraine. Now accepting cryptocurrency donations. Bitcoin, Ethereum and USDT.”

Forex
Commodities surged, and traditional safe heavens, such as bonds and the US dollar, rallied. Volatility is expected to increase and stocks to decline as risk-off sentiment takes hold.

Treasury yields, including for the 10-year benchmark note, provide a leading indicator signaling where rates are likely heading. Indeed, we expect additional clues this week.

Yields have closed at the top of a potential falling flag, bullish after an initial surge. An upside breakout would confirm that the uptrend for yields will resume following the preceding pennant and symmetrical triangle.

Rising yields could weigh on stocks, as higher rates make shares more expensive. Also, the higher payouts from bonds would then compete with equities for investor funds.

The dollar jumped last week after Russia invaded Ukraine, but settled a bit lower during Friday’s trade.

The US dollar found resistance at the top of a Diamond, which is expected to also be a USD top. If, however, the price repeats Thursday’s upside breakout and endures above the pattern, its bearish implications will reverse.