MARKET WRAPS
Stocks:
European stocks careened lower on Monday on the threat of further sanctions against commodities production giant Russia over its invasion of Ukraine.
The Stoxx Europe 600 was on track for its worst performance on the year, as commodity prices skyrocketed in response to U.S. Secretary of State Anthony Blinken saying there were active talks about banning Russian oil imports.
Commodities, which saw the biggest spike in 50 years last week, kept surging, as Brent crude oil futures leapt to $127 per barrel, and wheat futures spiked by 7%.
"While the Russian aggression in Ukraine continues the risk of a further escalation keeps investors unsettled," said Thomas Hempell, head of macro and market research at Generali Investments. "Price pressures are compounded by mounting risk of supply chain disruptions as Russian firms are cut off financially and cargo traffic is curtailed."
Higher commodity prices and the resulting accelerated inflation are complicating the next moves of major central banks, who were largely set to begin tightening monetary policy before the war began. The European Central Bank is meeting this week, and investors will be watching for changes to its growth outlook and what this could mean for policy.
"This toxic cocktail poses a huge problem for central banks. Do they tighten monetary policy and risk pushing the world into a recession even quicker or do they allow inflation to rip higher, which would do the same thing?" Mr Hewson said.
Shares on the move:
European bank stocks fell in early trading after Russian attacks on Ukraine intensified and commodity prices rose. European markets traded in the red, and European lenders' shares recorded steeper declines, with UBS losing 8.5%, BNP Paribas down 7.9%, and Intesa Sanpaolo dropping 11%.
Although most European lenders--with a few exceptions such as Vienna-listed Raiffeisen--don't have substantial exposure to Russia or Ukraine, the sector's prospects are strongly linked to the macroeconomic outlook, which is being threatened by the possibility of an intensifying and protracted conflict.
Fears that supplies of oil and other commodities that the world economy relies on could be crimped have led prices to increase, adding to inflationary pressures.
Stocks to watch:
There isn't any other company in any other sector better positioned for the current environment than Glencore, said Jefferies, which recommends the stock as a core holding for the next five-plus years.
The Anglo-Swiss commodity mining and trading major's share price should peak above GBP10 this cycle, the U.S. bank said, driven by earnings growth and multiple expansion.
Jefferies said market dislocations have greatly increased as a result of the war in Ukraine and that could push EBIT at the marketing business above GBP4 billion this year, from GBP3.7 billion in 2021. Jefferies has a buy rating on the stock with a 550 pence target price. Shares traded up 2.1% at 470.35 pence.
Data in focus:
German manufacturing orders rose 1.8% in January, beating expectations, but were below December's month-on-month increase as supply-chain disruptions continued. Track the analysts' comments here [https://newsplus.wsj.com/search/realtime/topic/?searchParts=[{%22t%22:%22djn_subject%22,%22q%22:%22djn:S/GEMO%22,%22c%22:%22S/GEMO%22,%22n%22:%22Germany%20Manufacturing%20Orders%22}, {%22t%22:%22operator%22,%22q%22:%22and%22,%22n%22:%22and%22}, {%22t%22:%22freetext%22,%22q%22:%22market%20talk%22,%22n%22:%22market%20talk%22}]&searchFilterState=open&includeDefaultFilter=true].
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Market Insight:
For the eurozone economy, the war in Ukraine and the firm Western response are a huge external shock, mainly coming from a big one-off spike in import costs, Berenberg said.
Eurozone inflation looks set to surge to around 7% soon--or even more--Berenberg forecasts. But inflation will almost certainly recede significantly thereafter, Berenberg said.
This is because unlike the U.S., the eurozone doesn't exhibit any home-grown inflationary dynamic. "Near term, the eurozone will likely remain in the near-stagflation into which it had fallen with the Delta wave of Covid-19 infections in November 202--as the impact of the war offsets the post-Omicron rebound in services," Berenberg says. A recession, however, looks unlikely, Berenberg added.
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Stagflation will engulf the eurozone in the coming months because of rapidly rising commodity prices, weakening confidence, and tighter financial conditions as a result of Russia's invasion of Ukraine, BCA Research said.
However, the stagflation episode won't last beyond the summer, the research firm said. "Energy markets will regain their composure, the ECB won't tighten policy this year, household net worth is strong, the post-pandemic reopening continues, and fiscal policy will become significantly looser," BCA Research said.
U.S. Markets:
U.S. stock futures dropped after Russian forces intensified strikes across Ukraine and as the threat of a potential ban on imports of Russian oil helped spur a surge in energy prices.
Investors appear to be in classic flight-to-safety mode and stocks are suffering as a result, said Kelvin Tay, the Singapore-based regional chief investment officer for UBS. Very high oil prices will function as "a tax on the global economy, and therefore global growth will actually have to slow," he said.
Forex:
The dollar jumped as demand for the safe-haven currency surges due to Russia's continued invasion of Ukraine and the possibility that sanctions could include a potential ban on imports of Russian oil.
The DXY dollar index surged to 99.2130, its strongest since May 2020. "Expect the dollar to remain in demand today and DXY to continue heading towards 100," ING analysts said in a note.
Dollar demand and concerns about the impact of the Ukraine war on the European economy caused the euro to dive to a 22-month low of $1.0824.
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European currencies fell against the dollar as investors worried that a potential crackdown on Russian energy imports by the U.S. and its allies would hurt economic growth in the region.
The euro fell 0.6%, its lowest level since May 2020, according to FactSet. Investors have broadly sold European assets since the onset of Russia's war against Ukraine, worried that potential disruptions to energy supplies, a growing number of refugees to some countries and impacts on other commodities could weigh on growth.
The British pound declined 0.5% against the dollar to its lowest level since November 2020.
Currencies of eastern European nations nearest Ukraine have been the most heavily sold against the dollar. The Polish zloty declined 2.2% Monday to its lowest level in more than 20 years, and the Hungarian forint declined almost 4%. Both the zloty and the forint have also fallen sharply against the euro.
Russia's currency sank to a record low Monday as traders struggled to get access to the ruble. The ruble fell to 137 to a dollar, a decline of more than 10% from Friday's close, as traders say that the ability to buy and sell the Russian currency has become more limited as fewer banks want to settle transactions against it in the offshore market.
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The SNB is likely to intervene to contain the rise of the safe-haven Swiss franc due to Russia's continuing invasion of Ukraine if the EUR/CHF rate drops "rapidly" below parity, UniCredit analysts said in a research note.
EUR/CHF briefly broke below parity for the first time since 2015 in Asian trade, reaching a low of 0.9973, according to FactSet, before recovering to last trade at 1.0048.
"We expect the SNB to intervene if the parity threshold is rapidly broken," the analysts said. However, given that inflation is now accelerating in Switzerland, the SNB should be under less pressure to counteract the sharp appreciation of its currency than it was in 2015, they said.
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The Norwegian krone could extend its gains against the euro as oil and gas prices jump on supply fears caused by Russia's invasion of Ukraine.
"Until Europe builds more LNG infrastructure or the Netherlands chooses to pump more gas, it seems that Norway will offer the only alternative to Russian gas," ING analysts said.
Norway's terms of trade has spiked 50% over the past month, they say. EUR/NOK could fall to the October low around 9.65, they say. EUR/NOK falls 0.3% to 9.7636 after earlier hitting a four-month low of 9.7169, according to FactSet.
Bonds:
Bond yields are expected to drop moderately in the next three to six months, LBBW's analysts said. For the Fed, LBBW's analysts still expect five to six interest rate rises in 2022, but the likelihood of "super-sized" interest rate increases of 50 basis points has probably faded for now, they added.
They cut their 10-year U.S. Treasury yield forecast for the year-end to 2.25% from 2.50%, keeping the mid-2023 yield forecast at 2.70%. They expect the 10-year Bund yield at 0.30% at end-2022, down from 0.50% expected previously, while the mid-2023 forecast remains at 0.70%.
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Safe-haven assets are unlikely to lose their attractiveness in the short term because of the war in Ukraine, Raiffeisen Bank's analysts said. "As we do not expect an immediate easing of the conflict, but even a further intensification could still be ahead, we do not think that safe havens should lose their attractiveness in the short term," they said.
The German Bund curve reflects intensified demand for safe havens, and an adjustment, but not a reversal, of the European Central Bank's interest rate cycle, they said. Raiffeisen's analysts expect an incipient monetary tightening by the ECB in 2022 to be likely, but the war in Ukraine represents a major uncertainty factor for the extent and timing of the monetary policy outlook.
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German Bund yields are unlikely to stay below 0% for very long unless the economic hit from the war in Ukraine is enough to remove the need for monetary policy normalization altogether, said ING's rates strategists.
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03-07-22 0622ET
