Headlines in Asia have been dominated by reports that fighting had caused a fire at Ukraine’s nuclear power plant and Europe’s largest, Zaporizhzhia, in the Southeastern part of the country. That sparked a risk-off move in asset classes, with equities falling and oil rallying.
War reporting is a fluid situation at best and initial reports stated that one of the reactors, thankfully closed for maintenance but still containing nuclear material, was on fire. Further reports rolling in now seem to be saying the fire was outside of the reactor perimeter and that local firefighters had been allowed in to control the blaze without being shot at. That has caused a temporary pullback in the risk-aversion flows sweeping Asian markets.
It does now though, highlight another serious risk factor surrounding the Russian invasion of Ukraine, the safety of its nuclear plants now that Russia’s tactics appear to be shifting to its usual playbook, levelling cities into submission with artillery and rockets. Europe appears to be at the mercy of the ability of Russian artillery regiments to fire accurately. I’m not comforted by that.
Prevailing winds in the area run from east to west across some of Ukraine’s most important agricultural production areas, and into Western Europe. It doesn’t take a genius to extrapolate the potential risks associated with that scenario and I am struggling to see any reason why European markets won’t open deeply in the red once again this afternoon. Or indeed, whether this potential calamity would be the trigger for deeper involvement in the conflict by other national interests. With that in mind, any relief rallies, are probably opportunities to sell into.
Oil’s volatility was bordering on mind-boggling yesterday, with Brent crude a hairs-breath away from $ 120.00 a barrel, before plummeting to the $110.00 area as stories emerge that an Iranian nuclear deal was imminent, potentially in the next 72 hours. I have seen various bits of research on its impact, with the consensus being that Iran will add another 1.5 million barrels a day to global markets, as it is already selling quite a bit anyway via the seas of Malaysia and transponder-less tankers. That won’t go near to replacing sanctioned Russian production, and while it will be greeted with relief by markets, it won’t change the underlying dynamics. Elsewhere, agricultural, and base metal prices remained on fire as potential shortages send international buyers into a panic.
Ukrainian and Russian officials discussed humanitarian corridors and supplies yesterday at their meeting in Belarus, but nothing else concrete has emerged. Both sides have agreed to a third meeting, but I suspect any relief rallies will have a declining marginal utility from now on, as it seems that the Kremlin seems intent on prosecuting its invasion to its conclusion. Volatility will remain sky-high, and clutching-at-straws rallies will occur, but the stagflationary wave is on its way and the underlying trend is your friend.
With Ukraine dominating markets in Asia, there’s no point in talking about anything else really, except for China’s Two Sessions, which starts today, and the US Nonfarm payrolls today. Market talk is that China will set the lowest economic growth target in decades, between 5.0 and 5.50%. China's equity markets have been soft anyway as it grapples with shared prosperity and the property sector, and market reaction will be muted.
Nonfarm payrolls are expected to print at around 475,000 jobs added. I believe there are upside risks to that number which will lock and load a 25 bps hike by the FOMC this month. Only a huge downside surprise might give the Fed food for thought, or radioactive particles drifting across Europe. Otherwise, we remain on track for the start of many hikes from the Fed going forward as the Ukraine war throws more inflation onto an inflationary fire that was already burning brightly.
Nobody will want to be short risk going into this weekend, and as a result, I believe any rallies in equities, dips in the US dollar and Treasuries, and dips in gold, will be short-lived.
Asian equities spooked by Ukraine nuclear plant fire
Yesterday, European stock markets were crushed once again under Ukrainian nerves as commodity prices across the board soared. US stocks managed a modest recovery as bond yields steadied and hopes rose of an Iranian nuclear deal. But Wall Street still finished lower on the day, notably in the tech space. The S&P 500 fell b 0.43%, the NASDAQ dropped by 1.44%, and the Dow Jones edged 0.28% lower.
US futures, and the rest of Asia, have dropped today on the Ukraine nuclear power station fire situation, with all three indexes down around 0.80%. The contagion has spilt into the Nikkei 225, which has tumbled by 2.30%, while the KOSPI has fallen by 1.15%.
In mainland China, the Shanghai Composite is 0.40% lower, while the CSI 300 has dropped by 0.65%. Hong Kong is in full retreat, complicated by their rapidly deteriorating Covid-19 situation and the weighting of China tech heavyweights, the Hang Seng has tumbled by 2.50%.
Regional Asia sees Singapore down 0.50%, and Taipei down 0.80%. Commodity-heavy Jakarta, returning from holiday, has bucked the trend and risen by 0.80%, but Kuala Lumpur is 1.20% lower. Bangkok is down 0.90% and Manila by 0.40%. Australian markets are following sentiment and not commodity prices this morning, the ASX 200 and All ordinaries retreating by 0.85%.
The Zaporizhzhia situation, despite the reactors being intact and the fire actually being outside of the perimeter, has opened a new thread of risk around the Russia-Ukraine conflict. It is likely to unnerve European markets meaning that the downward spiral seen yesterday is likely to continue today. US markets, conversely, remain at the mercy of fast-money flows trading headlines.
The US Dollar surges on Ukrainian nuclear fears
Notably, the US dollar did not experience any relief flows seen in energy and equity markets overnight in New York, as US yields held onto their gains of the previous session. The rising price of commodities increases demand for US dollar, as does Ukraine haven flows, and should continue to support the greenback into the weekend. The dollar index rose by 0.38% to 72.73 yesterday, climbing another 0.20% to 97.925 as the Zaporizhzhia headlines hit the wires this morning.
By contrast, the euro suffered yesterday, EUR/USD sliding 0.50% to 1.1060 yesterday, and falling another 0.30% to 1.1030 today. The single currency is guilty by geographic association now and the nuclear headlines today will not help its cause. Having fallen through 1.1100 yesterday, EUR/USD’s next level of importance is a two-decade support line that lies at 1.0800. EUR/USD could still potentially see a relief rally if an Iranian nuclear agreement is announced but will struggle to recapture 1.1200.
GBP/USD fell by 0.45% to 1.3350 yesterday, easing to 1.3345 today. It has double bottom support at 1.3275, failure of which signals deeper losses. Like EUR/USD, it has the potential to stage headline-driven relief rallies. Overall, even as the Zaporizhzhia situation eases, European currencies are likely to remain offered as yet another risk factor is introduced into the Ukraine conflict.
AUD/USD and NZD/USD both rose yesterday and continued climbing today. I have been waiting for both to catch a commodity tailwind and it seems that that time is now upon us. Put simply, Australia, and to a lesser extent New Zealand, grow, pump or dig out of the ground, all the stuff that the world is desperate to by right now at seemingly any price.
USD/JPY is trading at 115.45 today, roughly midrange for the week. It is capped at 115.80 with support at 114.75 as the Yen is bounced between domestic haven flows and yield differential outflows. Asian currencies are mixed with the Indian Rupee and Korean won notable losers, while Indonesian Rupiah and Malaysian Ringgits remain steady. That is probably an easy way to play the commodity price story at the moment from an Asian perspective. Currencies across the region are likely to remain soft into the weekend as investors hedge risk in US dollars.
A high print by the US Nonfarm Payrolls today will reignite Fed hiking fever, with more rate hikes being priced back in. That should be US dollar supportive, along with weekend risk-hedging flows. Nobody wants to be short risk into the weekend and being long US dollars is the easiest way to play this.
Oil’s price action gets emotional
If you’re looking for volatility, trade oil markets. Oil’s price action yesterday bordered on outright lunacy as Brent crude rose from $1104.50 to $119.70, before falling to finish 3.60% lower at $110.40 a barrel. WTI had a similar day, an aggressive rally and capitulation to finish 3.0% lower at 108.00 a barrel. Oil rallied on Ukraine and supply concerns yesterday until news hit the wires of an apparently imminent Iranian nuclear deal, whereupon the herd turned south in a cloud of dust.
Oil prices shot higher in Asia as physical buyers jumped on the dip and the Zaporizhzhia reactor headlines hit the wires, both contracts climbing over 3.0% initially. With nerves slightly less frayed a few hours later, both contracts remain elevated. Brent crude and WTI are 2.0% higher at $112.50 and $110.00 a barrel respectively.
On a technical basis, both contracts' relative strength indexes (RSIs) remain grossly overbought, meaning more relief sell-offs are entirely possible. That will probably require a formal Iran deal announcement now. I see it as entirely possible that both Brent crude and WTI trade between $105.00 and $120.00 a barrel ahead of the New York close, it’s that sort of market.
Gold remains a possum in the headlights
Gold continues to trade like a possum in the headlights, unable to decide whether it is a wartime haven asset, or grossly overbought and about to correct. The net result is it remains running on the spot, albeit not far from recent highs. Gold rose 0.40% to $1936.00 yesterday, adding another 0.15% to $1939.50 in Asian trading.
Gold remains overbought on a technical basis, and is still vulnerable, therefore, to long positions losing their nerves and sparking an aggressive corrective sell-off, with the rally now stalled like a Russian logistics chain. Gold looks set to continue trading in a $1920.00 to $1950.00 an ounce range, with major support/resistance at $1880.00 and $1975.00 an ounce respectively.
Silver's price action remains constructive ad appears to be forming a bullish pennant formation. Key levels are $24.8500 and $25.6000.