- Commodities surge across the board, heightening fears about a global recession
- Crude oil hits $130 a barrel, gold soars past $2,000/oz, but dollar slightly softer today
- Selloff in euro and equities takes a breather for now after fresh lows
Markets seek respite as fighting continues
The fighting in Ukraine is intensifying and a third round of talks between Russian and Ukrainian officials has not led to much progress, but markets are nevertheless taking a breather from the recent turmoil on Tuesday.
Risk assets are seeing a tepid rebound in European trading, with reports that Russian forces are struggling to capture major cities in Ukraine after two weeks of shelling possibly raising speculation that Moscow may yet want to negotiate its way out of this mess.
The major European bourses are up between 1% and 3%, recouping some of the losses from three straight sessions of heavy declines. US stocks futures have also turned green after the S&P 500 slumped by 3% yesterday.
Investors might also be hoping that a meeting between the two countries’ foreign ministers in Turkey on Thursday could yield a more positive result than the talks that have taken place so far.
In the meantime, however, there are no grounds for a sustained recovery in risk appetite as the situation remains highly volatile. With the US Congress moving to ban imports of Russian energy products, Russia on its part is threatening to cut off Europe’s gas supply via Nord Stream 1.
Although that’s not very likely to happen unless European countries join Washington in restricting Russian oil exports, which they’re not ready to just yet, investors are no longer being complacent about how far this crisis can escalate.
Threat of more sanctions weighs on markets
The existing harsh sanctions on Moscow have already roiled commodity markets and there’s an elevated risk of even more punitive ones to come. Crude oil has skyrocketed to the highest since the height of the financial crisis in 2008.
Brent crude futures briefly surged to $139.13 on Monday and WTI futures touched $133.46 a barrel.
Other commodities of which Russia and Ukraine are a major supplier of such as wheat, corn, palladium and nickel have also seen their prices shoot up since the onset of the war, fuelling fears not only of even higher inflation, but also of a new worldwide recession.
The safe-haven gold is also rallying, smashing the $2,000/oz level yesterday to hit the highest since August 2020. The precious metal is extending its gains today amid a slight pullback in the US dollar.
Dollar eases back, awaits CPI data
The greenback, along with its other haven peers, the Japanese yen and Swiss franc, has soared as investors have fled to safety during this chaotic period for financial markets.
The dollar was already on a roll, however, even before this crisis started to unfold, as investors were anticipating the Fed will have to hike interest rates aggressively to combat the spiralling inflation problem in the United States and to cool the labour market.
The next CPI report is due on Thursday and could complicate things for Fed policymakers if inflation beats the estimates of 7.9% y/y.
Euro slightly firmer, all eyes on ECB decision
But the dilemma is even bigger for the European Central Bank as it has a tougher job of balancing growth with rising inflation given that the Eurozone economy is expected to take the brunt of the hit from the global sanctions on Russia.
The ECB meets on Thursday and could add to the euro’s downside if it opts against ending QE this year. The euro plummeted to a 22-month low of $1.0804 on Monday and fell below parity against the Swiss franc. It has bounced back against both currencies on Tuesday, possibly with the help of SNB intervention.
The pound is also off its lows after it slid to a 16-month trough of $1.3079 earlier in the session. The aussie and kiwi, meanwhile, have been surprise beneficiaries of the Ukraine-driven risk aversion amid the commodities rally. But both antipodean currencies have eased off their highs today.