Unsurprisingly, Russia’s invasion of Ukraine stole all of the headlines last week. Whilst the invasion had been seemingly inevitable to us all bar Mr Putin himself, we are now all left questioning what Putin’s ‘end-game’ intentions are. Just a few days ago, there was a widely-felt perception that he would be happy to walk away with control of the Donetsk and Luhansk regions of eastern Ukraine. Still, the Russian army has since swiftly moved on to penetrate parts of both Kyiv and Kharkiv, which are the two largest Ukrainian cities (by population). Heavy casualties on both sides imply that Russia may be in for more of a battle in their pursuit than they had initially expected.
NATO countries have since unleashed a wall of sanctions on Russia, in part to limit Putin’s ability to fund a lengthy occupation. However, with Russia being able to lean on friendly allies such as China—who themselves are more than happy to swap essential goods for oil credits—the Russian economy might be less impacted, at least in the short run. Having a pocket with over $600 billion of Foreign Exchange reserves to lean on also helps to soften the impact. News over the weekend that ‘some’ Russian banks are to be excluded from the SWIFT system will pose a more annoying intrusion to daily life for Russians, but the move will cut both ways, given that many European companies have operations in, and dealings with, Russian counterparts.
By the end of the weekend, Putin had responded to the sanctions by placing Russia’s nuclear forces on high alert—a move which was widely condemned by NATO and the U.S. There is one glimmer of hope, however, with news that both sides have agreed to ‘unconditional’ peace talks on the Belarus border.
Risk-off, on, and off again!
Markets have reacted in a somewhat predictable manner. First, the ‘sell-off’ on the speculation, which was further intensified by the initial Russian invasion. Oil subsequently burst through $100 pb for a while, and investors sought sanctuary amongst the ‘traditional’ safe-havens such as Gold (over the tech-following Crypto), U.S Treasuries, and the USD and JPY in the currency space. By the close of play on Friday, markets had calmed and a more measured reaction ensued.
However, the mere mention of the word ‘nuclear’ (by Putin) has driven a further sell-off on the open this morning. The pound had regained some of its composure after slipping back toward 1.3200 versus the dollar earlier in the week. Similarly, the EUR fell back to 1.1100 versus the greenback before it too rebounded to close back near 1.1300, before a predictable retreat this morning. GBP/EUR, therefore, traded between 1.2048 and 1.1905.
Aside from markets playing headline tennis on events unfolding in Ukraine, this week has the potential to go many ways with a plethora of economic data releases due. Headlining will be the latest U.S jobs data (Friday). A +400k gain is expected on the headline. Markets (and the Fed) will also pay very close attention to see whether wage growth is accelerating anywhere near those current lofty inflation levels.
Furthermore, markets will be also be assessing whether the frothy U.S jobs market can maintain the existing market-implied expectations for a slew of U.S interest rate rises this year. Or whether any slowdown, coincided with geopolitical risks (Ukraine) spilling over into weaker global growth, forces the fed to keep the brakes on. Indeed, some analysts are now actively scaling back their expectations for next month’s Fed meeting from a 50bps hike to 25bps. That could impact the outlook for, and the direction of the greenback.
Markets will have to wait until Thursday for any keynote UK data this week when the latest Market/CIPS PMI data is released. A sharp contraction is expected for February, after the Services PMI hit 60.8 last month, with the composite release coming in at 60.2. Therefore, in the meantime, the pound will take its lead from Ukraine and the outlook for the greenback.
A bumper week for Australian data kicks off with the latest Retail Sales data (exp +0.4%), followed by the RBA interest rate announcement (Tuesday/no change expected), and GDP (exp +0.4% for Q4). Canada is expected to raise interest rates by 0.25% to 0.5% on Wednesday. The high oil price has helped to boost the Canadian economy as it recovers from the latest Covid-led lockdowns. PMIs and Retail sales highlight the data calendar for Europe.