Kherson falls to Russia?

Russia said yesterday that they were sending delegates to Belarus for a second round of peace talks, (hopefully) aimed at ending the war in Ukraine. Ukrainian president, Zelenskiy, suggested that there would need to be a ceasefire if they wanted to talk. Markets were buoyed by that faintest hope of progress yesterday, and the news was enough to spark a collective rally in risk appetite on the day. Profit-taking in Gold, after the strong rally, further endorsed the broader market moves. However, there are unconfirmed reports overnight that Russia may have taken control of the strategic Port of Kherson, which would be the first significant gain for the Russian army. They also finally admitted that they had suffered heavy casualties during the fighting in Ukraine.

Miscalculation

Whilst none of us can ever really tell what Putin is thinking, the war in Ukraine is not helping his political standing at home. He really has miscalculated here. Those sanctions have been biting at home already, and the list of companies refusing to deal with Russia is growing by the minute, which will only intensify the issues. Even in the energy sector, where sanctions have been intentionally overlooked by NATO & Co, Russia is now struggling to sell most of its oil and commodities. Western companies do not want the association or the risk of repercussions from governments and shareholders.

Slow progress

Putin looks to have miscalculated on the battlefield, too, at least for now. ‘That’ convoy of tanks and ammunition heading toward the key cities in Ukraine has slowed. Gains have been slim and Ukrainian resistance has held firm. Talks of food and fuel shortages in the Russian army have been combined with stories of soldiers abandoning their machinery, hungry and disorientated. In some cases, those soldiers said they did not realise that they would be sent to fight Ukraine.

Powell and the Dollar

Fed Chair Jay Powell, spoke before Congress yesterday on the first day of his semi-annual testimony. Given the high prospect that global growth will slow due to the war in Ukraine, there was increasing speculation that Powell may have used the testimony to dampen market expectations for future Fed rate hikes. He said that if inflation persists, the Fed would be prepared to raise U.S rates in 50bps increments. However, he also said that the Fed will proceed carefully in light of the Ukrainian war and that news (plus a dollop of positive risk sentiment) sent the dollar down on the day. The JPY followed suit.

A sterling rally, BoC and EUR

GBP/USD moved back up from under 1.3300 and popped its head over 1.3400 as a consequence of the weaker USD. Remarkably, EUR/USD also managed a rally back over 1.1100 and was buoyed by higher annual inflation in the region, which moved up to 5.8%. Markets had expected a figure of around 5.3%. With oil above $100pb and energy costs accelerating at an alarming pace, inflation in Europe looks set to squeeze even higher over the coming months, which will give the ECB a challenge given their obvious reluctance to raise rates. Unlike the ECB and as expected, the BoC raised Canadian interest rates for the first time since 2018 by 0.25%.

Oil — 60 divided by 5 equals 12

Please excuse the math, but markets have not exactly reacted with glee to the EIA’s release of 60 million barrels of strategic oil reserves (on Tuesday). Why? Well, Russia produces 5 million barrels of oil a day, so it will take roughly 12 days for the world to drive, fly, manufacture, and heat its way through that release before those supply constraints intensify. Hence the fact that oil moved over $110. End of lesson.

Data corner

A slew of U.S data today is headlined by the latest ISM Services PMI. Markets are expecting around 61, up from 59.9 last month. PMIs and unemployment are also due across Europe. Jay Powell gives the second day of his semi-annual testimony to Congress, and after that rate hike in Canada, BoC governor Macklem speaks too.