- Markets await West’s next move on Russia as Biden in Brussels for NATO summit
- Stocks mostly up on solid PMIs despite yields also paring yesterday’s losses
- Yen extends slide, dollar keeps grinding higher as more hawkish Fed talk eyed
Cautious mood as fresh sanctions likely during Biden trip
It’s been a relatively calm but mixed start to the day as investors are waiting to see what new measures NATO leaders will agree on to curb Russia’s advances into Ukraine. US President Joe Biden will be attending the emergency summit in Brussels as well as participating in an EU Council meeting. He is expected to announce yet more sanctions against Russia, most likely on lawmakers and oligarchs, though, more interesting for the markets will be what, if any, new action the European Union will come up with.
European leaders are under pressure to get even tougher on Moscow by banning Russian oil imports. However, the risk is that Russia would cut off gas supplies to Europe in retaliation – something that would almost certainly trigger a recession in the euro area, as it would be difficult for other countries like the US to fully compensate for the continent’s energy needs. Hence, the stakes are high should the EU decide to escalate its response.
Strong PMIs offer some relief for stocks
For now, though, there is some relief that European economies entered the crisis in robust shape. Today’s flash PMI releases for the Eurozone and the United Kingdom have been much better than expected. The services sector in particular appears to have expanded at a much healthier pace than anticipated in the first half of March. Asian PMIs were also quite decent, lifting the mood in equity markets.
Nevertheless, despite the upbeat data, European shares were struggling to hold onto earlier gains as much of the strength in the PMIs came from soaring price indices.
The rebound in European equities has stalled this week even as Wall Street has maintained some positive momentum. Surging Treasury yields and a hawkish shift by Fed Chair Powell only caught up with US stocks on Wednesday when the S&P 500 dipped by 1.2%.
E-mini futures have started the day in positive territory, however, once again indicating that investors aren’t as fearful about a recession in America as they are in Europe, despite a flattening US yield curve.
In Moscow, meanwhile, the MOEX Russia Index climbed about 10% in very restricted trading when the stock market reopened for the first time since the onset of the war.
Dollar edges up as yen crumbles again
The Russian rouble on the other hand slipped by more than 7%, reversing most of yesterday’s gains when it was boosted by President Putin’s decision to force “unfriendly” countries to pay for their gas purchases in roubles rather than in US dollars.
The greenback maintained an upward trajectory on Thursday, rising against all of its major peers as Treasury yields headed back up again. Yesterday’s sudden drop in yields was likely down to the global selloff in sovereign bonds pausing for breath rather than any particular headline. Although there is some nervousness about the very slow progress in the ceasefire talks between Ukrainian and Russian officials and from fears about a possible chemical attack, the overriding theme in bond markets is inflation and the growing expectation that the Fed will hike rates by 50 basis points in May.
This week’s flurry of Fed speakers will continue on Thursday with Kashkari, Waller, Evans and Bostic, who will likely join their colleagues in endorsing a more aggressive stance in their fight against surging inflation.
More hawkish rhetoric from the Fed would only cause more misery for the battered Japanese yen, which has slumped to six-year lows against the dollar, breaching the 121-yen level. Investors are dumping the yen in droves as not only is the Bank of Japan not expected to tighten monetary policy anytime soon, the rally in energy and other commodities is digging a massive hole in Japan’s current account balance.
Franc only slightly dented by SNB policy decision
The Swiss franc fared a little better than the yen on Thursday after the Swiss National Bank kept its monetary policy settings unchanged. The SNB has not hardened its language on the exchange rate even though the franc has been appreciating on the back of the Ukraine fallout. Policymakers might be hoping that a stronger currency will lessen some of the inflationary impact from the war, while maintaining rates at a record low.
Both the euro and pound remained under pressure for a second day. Yesterday’s spring budget statement from UK Chancellor Rishi Sunak did not go far enough to ease concerns about the hit to households from the significant jump in the cost of living. Subsequently, sterling is testing the $1.32 level again.