Week In Review: Ongoing Geopolitical Risks, Blazing US Inflation, Hawkish ECB

A wave of risk aversion swept across financial markets on Monday following news over the weekend that the United States could potentially ban Russian oil imports. Asian markets were a sea of red while European shares tumbled to a one-year low as investors rushed towards safe-haven destinations.

Oil prices hijacked the financial market headlines by surging closer towards the 2008 all-time high. The global commodity drew strength from supply-side fears as the potential bans were seen creating further disruptions in the global energy markets. In the currency space, the king dollar extended gains while gold pressed against $2000.

Tuesday was an ugly day for global markets as surging crude oil prices deepened concerns about economic growth. Shares in Asia extended losses after Wall Street logged its biggest more than a year in the previous session. Risk-off was certainly the name of the game as investors rushed towards gold and other safe-haven assets. On the data front, economic activity in Europe slowed sharply at the end of 2021 as expected. GDP expanded at 0.3% quarter-on-quarter over the three months to December. 

Our trade of the week was none other than gold. We questioned whether the precious metal had the potential to hit fresh all-time highs amid the heightened levels of uncertainty and geopolitical risks and falling bond yields. Overall, it was another explosively volatile week for the precious metal as the risk pendulum swung back and forth. After rallying close to the all-time high, gold tumbled on Wednesday to conclude the week below $2000. 

With oil’s explosive momentum resembling a speeding train reaching maximum velocity, we asked whether oil bulls were unstoppable. Fundamentally, the US and Britain’s decision to ban Russian imports fuelled supply-side fears, propelling prices higher. Interestingly, oil prices reversed course mid-week with Brent shedding over 4.5% and Crude more than 5% this week.

Before the heavily anticipated European Central Bank (ECB) meeting and US inflation data, we shared a mid-week outlook focusing on hidden jewels and gems. There were a couple of interesting setups on the table, ranging from the potential EURUSD throwback to the GBPUSD breaking below key support and USDJPY rallying towards 117.40.

The mood across financial markets slightly improved mid-week as investors placed hopes on EU leaders fending off a recession caused by geopolitical risks. Global equities staged a rebound amid the renewed risk appetite while gold and other safe-haven assets took a hit.

On Thursday, the European Central Bank meeting did not disappoint. Hawks were certainly in the building with the central bank announcing it will stop pumping money into financial markets this summer. The balance of power seems to be swinging in favour of hawks as officials focused on the risk of rising inflation. In the United States, inflation hit a new 40 year high at 7.9% in February thanks to strong demand and supply constraints. With inflation expected to remain at elevated levels due to a surge in global oil prices, this may reinforce expectations over the Federal Reserve raising interest rates multiple times in 2022. Markets are expecting a rate hike in March and have priced in 6 over the next few months. 

As the week slowly came to an end, a sense of caution enveloped markets as the blazing US inflation report fuelled fears around higher interest rates. Uncertainty over the Ukraine conflict also added to the negative vibe, weighing heavily on equities. The S&P500 concluded the week almost 3% lower weighed down by tech and growth stocks. Brent oil prices were able to find support around $110 while the Dollar Index (DXY) pushed back above 99.0.

US CPI USD GBP JPY EUR ECB Gold Oil Bonds