Energy markets were shaken overnight as Russian President Putin directed that payments for Russian natural gas by “unfriendly nations” be paid for in rubles (RUB), giving government officials and the central bank a week to come up with a mechanism. As telegraphed yesterday, Russia also announced the full closure of the Caspian Pipeline Consortium’s Black Sea terminal because of “storm damage.”
The ruble natural gas announcement sent European gas benchmarks 30% higher on the day, while the CPC closure, through which 1.20% of the world’s crude flows, caused oil prices to spike, sending Brent crude above $120.00 a barrel. USD/RUB fell below 100.00 as the ruble rallied. The devil is in the detail of course, and European importers rightly point out that payment terms in supply contracts are for payment in hard currency, mostly US dollars and euros.
Good luck enforcing that, however, with Russia probably likely to reply that the freezing of its currency reserves is illegal as well. As ever, the winners will be armies of lawyers.
The events in energy markets overnight were a harsh dose of reality to the world’s markets. Even if the conflict in Ukraine stopped tomorrow, the inflationary wave from commodity disruptions will not. The world has changed, and globalization is the loser. That was enough to stop the European equity rally in its tracks as European markets tumbled. Even the perpetual dip-buyer FOMO gnomes of New York were forced to take a breather, with equities reversing their naive gains of the day before.
Oddly enough, US yields fell yesterday but provided no solace for equity markets. A procession of very hawkish Fed officials continued to pour water on markets, as did negative outlooks from companies such as Adobe (NASDAQ:ADBE). Look out for more of that during the next earnings season.
With the sharp rise in risk-free rates, corporate finance-speak for US government bonds, yesterday's 20-year auction was extremely well supported and is the main reason long-dated yields fell. It will be interesting to see if that is just temporary. It is a microcosm that should give the still-rich pricing of many a stock food for thought. If institutional investors decide that bond yields are now attractive, and low yielding and highly-priced stocks are not, another headwind for equities appears.
Currency markets contented themselves to watch from the sidelines yesterday, with another day of choppy ranges with not much to show for it, unless, somehow, you can trade rubles. Precious metals staged an unconvincing rally that owes as much to the fall in US yields on Wednesday, as it does to haven flows after yesterday's energy developments.
US data yesterday didn’t give much cause for optimism either. New Home Sales rose by less than expected, sparking a few “is this the top?” nerves, especially with the Fed governor rent-a-crowd universally now uber hawkish. The r for recession word is floating around more and more. Given how far behind the curve the Fed and its central bank kin have been on inflation, the cynic in me says it wouldn’t be a surprise if they made a total mess of the pivot as well. US official Crude Inventories fell by more than expected another tailwind for oil prices.
Today is Purchasing Manager Index (PMI) day across the world. Both Australian and Japan Manufacturing and Services PMIs surprised to the upside for February. It is notable that both central banks are officially still uber-dovish, although I am not sure if the Aussies will hold out for much longer. The outperformance of commodity-rich Australia was no surprise, but Japan was. As the Ukraine war drags on and potentially years of Russian sanctions ahead, I am not sure Japan will maintain the momentum.
Similarly for pan-European PMIs, notably Germany and their Prince Harry, the United Kingdom. It seems inevitable that the Ukraine war will negatively impact the Services and Manufacturing PMIs, with little fiscal wiggle room now after years of COVID stimulus, and with the disruptions being external. Given the negativity, less bad than expected data could potentially cause a relief rally in equity markets and lift the euro.
The US releases Durable Goods and Markit Manufacturing and Services PMIs. Being partially insulated from Eastern Europe should see the February data remain robust. In contrast to Europe, the risks lie to the downside. Weak prints, combined with a hawkish Fed, will raise the stakes on the Fed-has-got-it-wrong-there-will-be-a-recession argument. That may see the US dollar fall along with US yields. You could construct a bullish or bearish argument for equities in that scenario; I’m not even going to try, although you should never count out the FOMO gnomes.
In other news from Asia, Singapore’s Prime Minister announced it is sharply reducing domestic COVID restrictions, and those for incoming travelers. Likewise, Indonesia’s President also announced an easing on international traveler restrictions and restrictions on movements and gatherings over the upcoming Ramadan. Both stock markets have risen modestly in response.
Asian equities mixed after torrid New York session
Overnight, sharply higher energy prices, as outlined above, and a procession of hawkish Federal Reserve officials on the wires, saw the gains of the previous day mostly wiped out, despite yields falling. The S&P 500 fell by 1.21%, the NASDAQ retreated by 1.32%, and the Dow Jones was lower by 1.30%. A sudden reversal lower by oil prices just now seems to have lifted sentiment slightly, futures on all three rising by around 0.20% in Asia.
Asia is somewhat mixed, falling initially in lock-step with Wall Street overnight, before retracing some of those losses, and in some cases, moving into positive territory. The sudden reversal in oil prices potentially assisting. The Nikkei 225 is down 0.45%, with South Korea’s KOSPI 0.50% lower. In China, the Shanghai Composite is 0.55% lower, with the CSI 300 falling by 0.65%, while Hong Kong has edged to a 0.15% gain.
In regional markets, loosening COVID-19 restrictions see Singapore rallying by 0.80%, with Jakarta climbing 0.60%. Taipei is down 0.30%, but Bangkok has risen by the same, with Kuala Lumpur unchanged. Australian markets are holding in modestly positive territory, the ASX 200 and All Ordinaries rising by 0.20%.
The evolution of the Russian ruble gas payment story and the PMI releases will dominate proceedings in Europe today. Likewise, the Durable Goods and PMI data in the US will set the tone, with downside risks surrounding those releases.
Currency markets remain in a holding pattern
Currency markets had another night of quite wide ranges, but ultimately closed once again not far from where they started. The currency space appears to have moved to the sidelines, for now, content to wait and watch for developments elsewhere for its next directional cues. The Dollar Index traded in a 50 point range overnight but ultimately finished just 0.205 higher at 98.60. the rally has continued in Asia, where US 10-year futures have fallen sharply (yields higher). That has pushed the Dollar Index up to 98.80 this morning. 97.70 and 99.50 remain the levels to watch for directional clues.
EUR/USD continues to trade each side of 1.1000, falling 20 points to 1.0980 in Asia. EUR/USD remains midrange between critical long-term support at 1.0800, and resistance between 1.1150 and 1.1200. Short of a peace agreement arriving between Ukraine and Russia, the single currency will struggle to maintain gains above 1.1100 for now, with the ruble/gas situation another headwind.
GBP/USD fell 0.45% to 1.3200 overnight, easing to 1.3190 today. The UK Chancellors Spring statement contained a few tax-cutting goodies but appeared to have been priced in, as was the overnight inflation data. Sentiment seems to be swinging between a less hawkish and more hawkish Bank of England going forward, with moves in Sterling reflecting those swinging sentiments. GBP/USD has nearby resistance at 1.3300, followed by 1.3400, with support at 1.3125 and major support at 1.3000. Like EUR/USD, I have doubts about Sterling maintaining gains over 1.3300.
USD/JPY has stabilised at 121.25, where it remains today, thanks to lower US yields overnight. US yields are rising in Asia today once again, and the topside pressure on USD/JPY is likely to resume if the well-supported 20-year auction overnight proves a temporary respite. USD/JPY remains on track to reach 122.00, and only a fall through 119.00 changes the bullish outlook.
The Australian and New Zealand Dollars have given back all their overnight gains today, trading at 0.7470 and 0.6950 respectively. The story is much the same in the Asian currency space, where a neutral PBOC USD/CNY fix gave no directional impetus. Lots of good news is baked into AUD and NZD prices, which are also being supported by AUD/JPY and NZD/JPY buying. That heightens the risk of a downside correction. Asian currencies are still trending weaker but appear to be pausing for now awaiting developments elsewhere.
Oil prices soar overnight
Russia’s ruble/gas announcement, and the full closure of the CPC pipeline Russia sent European natural gas prices 30% higher, and also aggressively lifted crude prices, helped by lower official US Crude Inventories. Yesterday, Brent crude finished 6.05% higher at $121.40 a barrel, and WTI finished 5.20% higher at 114.35 a barrel.
Asia did its usual today, walked in, and started buying oil aggressively, sending prices 2.0% higher initially. However, in the last hour, oil prices have reversed sharply and are in negative territory now. I cannot see any reason for the reversal on the news wires. Brent crude is 0.60% lower at $120.80, and WTI is 0.55% lower at $113.85 a barrel.
Brent crude spiked to $124.00 overnight, but its lower close suggests that it lacks the momentum to move much higher in the short term. Any sort of Russian headline could change that of course, but I am still content to call Brent and WTI in a roughly $100.00 to $120.00 a barrel range for now.
The CPC closure will make an already tight market, even tighter, and will support dips now. On the other side of the equation, Russia holds all the cards on the natural gas front in the short-term – the long-term is a very different story – and contracts or not, Europe will probably have to accommodate Mr Putin after some grumbling and gnashing of teeth. This story could subside from the headlines quite quickly.
Gold rises with lower US yields
Gold rose by 1.23% to $1944.50 an ounce overnight, as a well-supported 20-year US bond auction pushed the US curve lower. It is likely to be a temporary respite for gold, though, with US bond futures already retracing lower this morning in Asia. That has lifted the US dollar and pushed gold down slightly by 0.25% to $1939.50 an ounce.
The risks are increasingly skewed to the downside, especially if the US dollar decides to rally in sympathy with higher US yields. Gold has well-denoted resistance between $1940.00 and $1950.00 now, followed by $1960.00 an ounce. Support lies at $1900.00, and failure will spark a retest of major support at $1880.00 an ounce. Failure of $1880.00 will likely spark a rapid capitulation trade targeting the low $ 1800s.