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Markets continue to trade geopolitics


Conflicting Ukraine headlines send stocks on a rollercoaster

Gold and oil push higher amid hedging demand, but cool off

Dollar takes a step back ahead of US producer price data

Lost in translation

Geopolitics remain in the driver’s seat for global markets, and it’s been a wild ride. A series of conflicting reports around Ukraine sparked all kinds of volatility in stocks yesterday as trading algorithms were apparently overloaded with headlines they couldn’t process.

It all started with the Russian foreign minister, who received Vladimir Putin’s blessing to continue negotiations for a diplomatic solution. That sparked a rally in risk assets but the optimism soon evaporated following reports that Russian troops were moving to attack positions, and after the Ukrainian president warned the attack would start on Wednesday.

This comment was later walked back by Ukrainian authorities as mere sarcasm by the president, who was apparently making fun of foreign officials predicting specific dates for the attack. Once traders realized it was just irony, the risk tone improved once again and shares on Wall Street bounced back to close the session with minor losses.

Market implications

Overall, investors seem to be in a ‘shoot first, ask questions later’ mode. Although war fears generally have a short-lived impact on equity markets, a Ukrainian invasion could be a special case given the spillover effects into energy prices at a time when central banks prepare to wage their own war against inflation.

Hence, an invasion could have far-reaching consequences for the global economy even if it doesn’t lead to a recession. The good news is that if war is ultimately avoided, there could be a powerful relief rally in riskier trades as both the geopolitical and inflationary risk premiums are priced out.

We are already seeing some signs of that today, with equity markets and the euro cheering some reports that Russian troops are returning to their bases after drills. With the fog of war clearing a little, gold and oil prices are on the retreat, surrendering the gains they recorded yesterday as demand for portfolio protection and energy stockpiling went into overdrive.

This crisis has been a perfect storm for gold, boosting the metal directly as a geopolitical hedge and indirectly by halting the relentless rise in yields, as traders piled back into the safety of bonds. The flip side of this argument is that bullion is now highly vulnerable to a de-escalation in tensions.

FX market breathes sigh of relief

A cautious sense of relief is coursing through the FX market on Tuesday, with the currencies that benefited from geopolitical nerves like the dollar and yen coming under pressure, while the battered euro recovers some ground.

Investors are grappling with how aggressively the Fed will raise interest rates to hammer down inflation, and the verdict will likely decide the path for the entire FX arena. Money markets are currently pricing in six and a half rate increases for the year and speculation for a 50 basis points move in March is running rampant.

However, Fed officials seem split on the matter. Some aren’t convinced a 50 basis points move is needed and worry it would spark unnecessary turmoil in the markets. This suggests the decision could ultimately depend on the final pieces of data heading into the March meeting, which elevates the importance of the producer price numbers coming up today.

Source: https://www.xm.com/research/analysis/marketComment/xm/daily-market-comment-markets-continue-to-trade-geopolitics-155159
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