Huge intraday turnaround as second day of Russian invasion continues

Markets are trying to make sense of recent price action after one of the biggest turnarounds in history.

Yesterday really was a tale of two sessions amid devastating scenes for the people of Ukraine. The greatest negative shock to the international orders since the end of World War two will have profound consequences. Yet, Asian and European markets are in positive territory after the massive recovery in Wall Street indices overnight.

Algos initially got to work selling every risk asset they could yesterday, as we witnessed a remarkable about-turn in the US session. The latter was brought about by the clear division in Western sanctions, which ultimately proved less harsh than feared. President Biden revealed in his press conference that barring Russia from the international payment system SWIFT was “not a position the rest of Europe wanted to take”. In addition, the sanctions notably did not hit energy and agricultural exports, which happen to be the goods that Russia most needs to sell and Europe most needs to buy.

One expert said, “these are sanctions designed not to sanction”.

Central bank policy under the microscope

There remains much uncertainty on the ground with the non-stop news headlines both alarming and devastating for Ukraine. Markets sadly concern themselves with risk, with central bank policy crucial to that. The bond market’s turnaround was equally as stunning yesterday, as the one seen in stocks. Traders effectively eased financial conditions as much as if the Fed had cut rates by 25bps, and then took it all back.

The key issue is inflation and the potential for stagflation; that is rising prices with slower growth.

Elevated prices were obviously already an issue for policymakers, and they may go higher, especially in energy and commodities. The conflict constitutes a negative supply shock and also a potential major demand shock for the Eurozone.

Most central banks are still expected to hike rates, but the big uncertainty will be the ECB.

Oil spikes higher, but still bid

Brent crude pared a 9% gain to 2.3% in a tumultuous session, and actually closed below the $100 level on the close as sanctions didn’t target oil and gas exports. But the escalation and uncertainty in the Ukraine crisis remains high with prices rising again this morning.

There is some speculation that the US could take further action to increase supply, potentially with a further release of oil from the Strategic Petroleum Reserve. President Biden will also likely pile the pressure on OPEC to increase output, but this may prove tricky.

The next OPEC+ meeting is on March 2.

The eight-year high at $102.08 hit yesterday will be the major near-term target for oil bulls. Prices are overbought on several different timeframes so the weekly close may be significant for near-term direction. Any impending news about the Iran nuclear deal and additional supply could also affect price action.

 

Ukraine crisis Russia Stocks US President Joe Biden Sanctions central bank ECB European Central Bank Brent Oil stagflation OPEC+ Iran nuclear deal