The fear of war between Russia and Ukraine has subsided a little on fresh developments, seeing a lift in risk appetite, driving up global equities and global rates and a chunky fall in oil prices. Currency movements have been modest, but the NZD and AUD show small gains while, not surprisingly, the euro has outperformed.
The market has been focused on geopolitical news around Russia and the Ukraine of late and this continues to drive some market volatility. After we went to press yesterday, there were reports circulating of satellite images showing Russian troops leaving assembly points, moving to attack positions. This caused a late dip in US equities, WTI crude spiking up through USD95 per barrel and some gyrations in US Treasuries.
In fresh developments overnight, in early European trading there were headlines that Russia was returning some troops to bases after drills. This was met with some scepticism by NATO and its allies, who wanted to see some hard evidence of this occurring before jumping to conclusions. Following that news, President Putin met with German Chancellor Scholz in Moscow and at a news conference Putin said “we want to resolve this issue now, right now or in the near future, through negotiations, peaceful means”.
These developments saw risk appetite improve and the S&P500 is currently up over 1%, while the Euro Stoxx 600 closed up 1.4%. Oil prices fell some 4% to USD92 on the WTI benchmark, while Brent crude is down to USD93. Reports of the troop withdrawal sent US Treasury yields higher, with the 10-year rate rising as high as 2.05%, and currently up 5bps for the day to 2.04%. There has been some evident curve flattening, with the 2-year rate down slightly for the day, retracing its earlier upward move.
Economic data have played a back seat role but for the record, US PPI inflation data were much higher than expected, with the headline rate showing a broadly based increase of double the expected monthly rate at 1.0% m/m, taking annual inflation to 9.7% y/y. The data add to the debate of how quickly the Fed should be withdrawing monetary stimulus, and whether 50bps moves are more appropriate than 25bps. However, the PPI data didn’t have any obvious impact on the market, with the strong inflationary pulse already well acknowledged by all.
The Empire manufacturing survey, the first of the regional US surveys for February, showed a much smaller bounce-back than expected, after the sharp fall in January.
In currency markets, the better mood music on Ukraine has seen the euro outperform, but currency movements overall have been modest. EUR is up 0.5% for the day to 1.1350. As we go to press, the ECB’s Villeroy has been on the wires saying that regular bond-buying under the asset purchase programme could end in Q3 and that the ECB could take more time to decide on rate hikes. The market is positioned for an earlier rate hike, and the fact that ECB members are talking about hikes won’t see the market deviate from that view for now.
The NZD and AUD have shown small gains to 0.6630 and 0.7145 respectively.
The overnight GDT dairy auction showed further strong gains in prices across the board, with the price index up 4.2%. The index has risen 13.7% this year already and the annual gain is close to 30%. Whole milk powder rose 4.2%, skim milk powder was up 6.0%, while butter and cheese also showed strong gains. It was only last month that Fonterra lifted its FY22 milk price range to $8.90-$9.50, and the overnight auction will cement in expectations of a likely record payout at the top end of that range. The futures market traded at $9.55 yesterday, already anticipating another upward revision.
The link between NZ commodity prices and the NZD broke down last year, so the NZD hasn’t seen any of the strength typically seen during the recent period of strong commodity price inflation. This is resulting in extraordinarily high incomes for NZ commodity exporters, who face the combination of high world prices and a soft NZD.
The domestic rates market continued to be knocked around by mainly global forces, with modestly higher swap and NZGB rates yesterday. Swap rates were up 1-2bps across much of the curve while NZGB rates were up 3-4bps. REINZ housing market data provided evidence of a weaker housing market, with a historically weak levels of sales in January across the country (down 29% y/y) and the house price index showing further signs of slippage, with the index now down 2.6% from the November peak, even if still up some 20% y/y.
In the day ahead, the economic calendar is full, with inflation data for China, UK and Canada and retail sales for the US being the key releases. Annual CPI inflation for the UK and Canada is expected to remain at historically elevated levels, while US retail sales should show some bounce-back in January from a weak December.
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