Once again, the relief rally has quickly reversed course, and once again the culprit is the Ukraine situation. The Ukrainian government declared a state of emergency across the nation and Russia issues notices to airmen (NOTAM’s) closing Eastern Ukrainian airspace to civilian aircraft, something they cannot legally do but that hasn’t bothered them so far. The Ukrainian government has since closed the countries airspace completely it appears, citing safety concerns. All of it points to an imminent “peacekeeping” mission by Russia, even as the UN Security Council meets over the matter.
The earlier announcements were enough to see a flight to safety yesterday once again, The US dollar rose, stock markets and oil and gold jumped. Somewhat surprisingly, US yields held steady, but I suspect they to will fall as investors park their money in the US government debt market. US 10-year yields are already falling in Asia this morning as investors pile in. Markets are pricing an invasion and an end to the spin/disinformation false flags, and I cannot disagree.
One thing I have noted since my return this week, it is the weakening power of the buy-the-dippers. Any retreat by equities over the past two years has been met by wall of money causing just as abrupt reversals. That is not the case now and is yet another warning sign that more pain may be ahead for equities and other asset classes, pimped up by the bottomless central bank money that flooded the world over the pandemic.
Although the rumors are swirling that an Iran nuclear deal is imminent, releasing potentially, another 1.5 million bpd onto world markets, it won’t save markets from an abrupt leap in energy prices as the Ukraine situation escalates. The timing cannot be worse as inflation soars anyway across the world, something that cannot be explained away anymore by “COVID difficulties” alone.
If the Ukraine situation forces central banks to halt policy normalization efforts, a stagflationary shock to the world is on the way. That won’t be good for equities, high yield credit, EM currencies, anything European or risk sentiment currencies such as the New Zealand dollar. Either the Ukraine gets thrown under the Russian tank tracks in a gross act of appeasement, or the rest of the world aligned against Russian aggression will have to wear some economic pain. I am not sure how much stomach, despite the rhetoric, there is for the latter.
The breaking news is that the invasion of the Ukraine has begun, even as news wires report Putin using neo-Nazis as a justification, and while the UN Security Council debate over the situation is going on. Brent crude is very close to $100 at time of writing……….
I’d talk about something else, but to quote Metallica, nothing else matters.
Equities tank on Ukraine invasion
Asian equities were on the back foot anyway after a soft New York session on Wednesday, but reports that the Russian invasion of the Ukraine is underway has sent them sharply lower once again. With the crisis escalating in the Ukraine, equities are tanking in Asia.
S&P 500 and NASDAQ futures are 2.0% lower while Dow futures have slumped by 2.50%. Japan’s Nikkei 225 is 2.25% lower while the South Korean KOSPI has tumbled by 2.35%. Mainland China is relatively calm, helped perhaps by their “national team.” The Shanghai Composite is down 0.65% and the CSI 300 has fallen 1.05%. Hong Kong is in full retreat, however, falling by 3.0%.
Regionally, Singapore is 2.50% lower with Taipei down 1.50%, while Kuala Lumpur and Jakarta are holding steady thanks to the jump in oil prices, down just 0.15%. Bangkok is down 0.80%. Australian markets are being cremated, the ASX 200 and All Ordinaries falling by 3.50%.
US Treasury yields are tumbling as investors seek shelter and it is hard to see any reason that stocks will reverse losses today. The effect on European markets later today is obvious, and they stand to fare worst out of this situation.
US dollar soars on Ukraine invasion
The US dollar has moved sharply higher in Asia as investors pile into US Treasuries and park their funds in a defensive US dollar position. The Dollar Index has risen another 0.30% to 96.50. Unsurprisingly, the euro has borne the brunt of the selling, EUR/USD falling 0.50% to 1.1250. GBP/USD has fallen to 1.3525. Key risk sentiment indicators, the Australian and New Zealand dollars, are 0.70% lower.
Asian currencies have also fallen, and the impending inflationary shock will impact Asia more than most as huge net energy importers. The INR, THB, KRW, SGD, PHP are 0.50% lower with the MYR down just 0.25%. Unsurprisingly, USD/CNY is almost unchanged.
Like equity markets, it is hard to find any reasons for the selloff to reverse now that it appears the tanks are rolling. Stronger sanctions are to come on Russia and energy prices will inevitably head higher in the short term. Only the Swiss franc and the Japanese yen are likely to hold their own as fellow haven currencies.
Brent crude hits $100 on Ukraine invasion
With a Russian invasion seemingly underway, and reports circulating that Russia has declared war on the Ukraine if the UN Ambassador to the Ukraine’s remarks is to be believed. Brent crude prices spiked higher, touching $100 a barrel before retreating slightly. Brent crude is 2.45% higher at $99.50, and WTI is 2.85% higher at 94.85 a barrel.
Overall, the price action is quite orderly, suggesting the market was positioned for this event. However, I believe this will not remain the case, particularly once the scale of the sanction response from the US and Europe, and the situation on the ground in the Ukraine become clear. A move above $100 appears inevitable, and I believe a move by Brent to $120.00 is not out of the question, as per my previous comments ad nauseum. There is not much more to say other than that oil remains bid on any sort of dip.
Gold rises on Russian invasion
Gold prices rose overnight on Ukraine nerves and have rallied by 1.0% to $1928.00 an ounce in Asia as Russian operations were launched. Gold has taken out resistance at $1920.00 and can now target $1960.00 and $2000.00 an ounce. Gold is coming back into its own as a haven asset and I do not rule out new all-time highs in prices in the weeks ahead.