Mixed messages

Markets have started the week in an uncertain fashion, unwilling to move decisively in either a risk-on or risk-off direction. This is probably unsurprising considering how far we’ve moved toward safety in the 18 days since Russia’s invasion of Ukraine, and the extent to which geopolitical headlines are sending mixed messages. Over the weekend, the Kremlin stepped up its bombardment of western Ukraine, at one point striking a training base just 15km from the Polish/EU/NATO border. Yet this morning, we heard reports that negotiators are set to hold further talks on a potential ceasefire. Likewise, the US accused Russia of asking China for military assistance for its war in Ukraine, risking an escalation in diplomatic tensions between the two nations. However, officials from both sides are set to hold face-to-face talks today, with White House officials hoping to convince Beijing to pressure Vladimir Putin towards de-escalation.

It looks as though we’re moving closer to a binary outcome situation, and with much of the negativity priced in, we could see positive headlines accompanied by a significant risk rally. Looking at the Euro/US Dollar currency pair, it’s clear that both parity and $1.20 are in play. The case for a move lower is heavily based around Europe’s exposure to the war, with options sentiment on the pair decidedly negative. The European Central Bank is also likely to lag behind the Federal Reserve in interest-rate normalisation, especially with the current risk of stagflation driving Eurozone GDP expectations lower. Still, the Euro looks appealing at current levels—well below the 10-year average of 1.1879. A de-escalation would likely be accompanied by a sharp Euro relief rally, perhaps testing the February 2nd high of 1.1490.

Bottom line: This war really has placed emphasis on a commentator’s best friend: the conditional. With geopolitical tensions at their highest since the Cold War era, it’s important to account for large price swings in either direction. In a world where uncertainty is growing ever-greater, the ability to hedge against risks is ever-present..

The week ahead
 

GBP 

Sterling continued its move lower last week, reaching fresh year-to-date lows against the US Dollar and falling 1.20% against the Euro following a hawkish tilt from the European Central Bank. Markets are anticipating a 25-basis-point rate hike by the Bank of England this Thursday as growth concerns relating to the Russia-Ukraine conflict taper the tightening outlook. Analysts at ING are expecting inflation to reach 8.00% year-over-year in April as the 54.00% rise in the energy price cap comes into effect. The FTSE 100 has been up 0.30% in early trading, while UK gilt yields are mostly higher ahead of the BoE interest rate decision later this week.

  • The UK Claimant Count Change will be released on Tuesday, with analysts expecting a print of 20.3K for February versus -31.9K in January.
  • Tuesday's UK Unemployment Rate reading is forecast to fall 10 basis points, taking the headline rate to 4.00% in January.
  • On Thursday, the Bank of England Monetary Policy Committee will communicate its latest interest rate decision. Markets have priced in a 25-basis-point hike, which could see the official bank rate reach 0.75%.

 

EUR

EUR/USD closed out last week 0.5% higher as the European Central Bank opted to pursue more hawkish monetary policy, boosting the common currency. ECB President Christine Lagarde announced that net bond purchases will end in the third quarter of 2022 and that despite the outbreak of war in Ukraine, inflation remains the governing council’s main concern. The central bank also issued some scenario-based forecasts. It said that if the Russia-Ukraine conflict deteriorates further, Eurozone growth could fall to 2.3% in 2022 versus prior estimates of 3.7%. European markets have gained across the board this morning, with the Stoxx 600 trading 1.2% higher.

  • Eurogroup meetings are scheduled to take place today, while the Economic and Financial Affairs Council (ECOFIN) will meet on Tuesday.
  • The latest ZEW Economic Sentiment data will also be released on Tuesday. The Eurozone figure is expected to read 10.3 while a print of 5.2 is anticipated for Germany as the Russia-Ukraine conflict dents optimism.
  • Euro area Industrial Production m/m is forecast to come in at 0.1% in January following the 1.2% reading in December.
  • ECB President Christine Lagarde is due to speak this Thursday at 9:30AM.

 

USD

The US Dollar Index managed another 0.15% gain last week as geopolitical risks continued to favour safe-haven assets. All sectors in the S&P 500 closed lower on Friday, with the index down over 12.00% year to date. US Treasury yields are trading higher at the start of this week, with the ten-year above 2.00% as markets look ahead to the Federal Reserve interest rate decision this Wednesday. Markets have priced in a 0.25% interest rate hike for this week’s meeting and a total of six hikes for 2022, totalling 165 basis points. With stagflation concerns circling, it will be important to note just how willing the Fed is to abide by this pace of tightening, with consumer sentiment hitting an 11-year low in March.  

  • US Producer Price Index and Core PPI m/m data for February is due tomorrow, forecasts suggest prints of 1.00% and 0.60%, respectively.
  • February’s Retail and Core Retail Sales m/m data will follow on Wednesday. Analysts expect respective readings of 0.40% and 0.90%.
  • The Federal Reserve will meet this Wednesday and reveal its latest economic projections and interest rate decision. Market pricing suggests a 25-basis-point hike.
  • US Industrial Production m/m for February is estimated at 0.60% versus 1.40% in January. 

 

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