- Lack of progress in Ukraine peace talks weighs on stocks again
- Euro slips as ECB’s hawkish surprise comes with a dovish twist
- Dollar hits 5-year high versus yen amid ongoing safe-haven appeal and Fed bets
Fresh jitters after no progress in Ukraine talks
Equity markets are feeling the strain of war again as talks between the Russian and Ukrainian foreign ministers in Turkey on Thursday went nowhere. Hopes that the two sides might reach some kind of a ceasefire agreement had reignited some risk appetite earlier in the week, but although markets remain relatively steady, it seems that the risk-on revival has gone as far as it can for now.
The longer the Russia-Ukraine conflict lasts, the more severe the impact on commodity prices will be, as well as on already pressured supply chains. But it’s not just businesses that look set to suffer the consequences of this geopolitical nightmare. Consumers everywhere will soon be feeling the pain of higher prices across the board, as food and fuel inflation is expected to soar even more over the coming months.
The ongoing standoff between the West and Russia is heightening fears of a global recession as central banks are being forced to tighten policy at a time when there are so many economic headwinds. The significant deterioration in the growth outlook is likely to weigh on stocks for some time, but for now, the small pullback in oil prices is providing some support to risk assets.
A mixed start for stocks
Shares in Europe opened mostly higher today following steep losses on Thursday. Wall Street also closed lower yesterday, but e-mini futures were only just in positive territory in European trade, suggesting sentiment remains fragile.
Fresh Sino-US tensions had earlier dragged Asian stocks lower after the US Securities Exchange Commission warned several Chinese companies listed in New York that they face being delisted if they fail to comply with auditing standards. Hong Kong’s Hang Seng index where the majority of Chinese tech firms are dual-listed ended the day sharply lower, but China’s main indices managed to reverse an earlier slide to close up.
ECB to stop QE but euro slips
In the currency markets, however, monetary policy divergence took over as the dominant driver following yesterday’s decision by the European Central Bank and the latest inflation data out of the United States.
The euro initially rose, but later fell back after the ECB announced an earlier-than-expected end to its asset purchase programme in Q3. Despite worries about the damage to the Eurozone economy from the tough sanctions against Moscow, policymakers went ahead and pulled the plug on stimulus amid spiralling inflation across the bloc.
There was speculation that the ECB might delay its exit due to the Ukraine crisis so the decision took many investors by surprise. Nevertheless, while this marks the end of the central bank’s controversial open-ended QE programme, policymakers signalled that an immediate rate hike is not on the cards. In the updated forward guidance, the ECB now expects to start raising rates “some time” after bond purchases have stopped as opposed to shortly after in the previous statement. Moreover, staff forecasts see inflation falling to 1.9% by 2024.
This indicates the ECB is keeping its options open when it comes to raising rates and will probably want to see whether some of the inflationary pressures will subside or worsen before committing to a timeline.
It also explains why the euro’s advance didn’t last long. In contrast, investors see less of a chance of a policy error by the Fed as the US economy is unlikely to be directly affected from the conflict in Eastern Europe.
US inflation hit 7.9% year-on-year in February, giving the Fed a final nod to begin a series of rate hikes when it meets next Wednesday.
Dollar surges versus yen, pound crumbles too
Fed rate hike bets have been creeping up again this week, with Treasury yields also marching higher. Expectations that the Fed will probably outdo other central banks in this tightening cycle along with ongoing safe-haven flows drove the US dollar higher on Friday.
The Japanese yen struggled the most as the Bank of Japan is now the only major central bank not tightening policy. The greenback has jumped to 5-year highs against the yen, hitting the 117-yen level.
Even the pound has been unable to resist the strong dollar, plumbing fresh 16-month lows below $1.31 today despite a fully priced-in rate hike by the Bank of England next week and better-than-expected UK GDP data earlier today.