Russian President Putin has significantly increased the stakes in the potential conflict that is bubbling under at the Russian/Ukrainian border. Putin has announced that Russia will recognize the independence of regions under the control of separatists in eastern Ukraine. This is a significant step up in this game of poker. The response of the NATO allies is to implement sanctions on Russia as their next step in this situation that is ratcheting up the geopolitical pressure.
The result on financial markets is another flight to safety (such as US Treasuries and gold) and a sell-off of risk assets (indices and cryptocurrencies). Volatility is spiking higher again and wild swings in markets can be expected depending on the newsflow.
US Flash PMIs and Consumer Confidence are on the calendar later, just fifteen minutes apart. Consensus is expecting a slight improvement in the PMIs but a mild decline in confidence. This may therefore have limited lasting market impact, especially as markets continue to focus squarely on geopolitical newsflow for direction.
Sentiment sours again: A flood out of higher risk assets (indices and crypto) and into safe-haven plays (US Treasuries, precious metals, and USD). The oil price is also spiking back higher again.
Treasury yields re-open lower: A flight to the safety of longer-dated US Treasuries has sent yields lower. The 10 year is around 5 basis points lower. [Risk negative]
Putin’s incendiary speech: Russia will recognize the independence of the Luhansk People’s Republic and the Donetsk People’s Republic in Ukraine. They will send “peacekeeping” Russian troops into Ukraine.
The response to Putin: Economic sanctions will be announced officially (likely today) by western allies.
German Ifo better than expected: The Business Climate has improved to 98.9 (from 96.0) which was better than the 96.5 consensus forecast. This improvement was driven by better than expected readings for both the Current Conditions and the Expectations components [EUR supportive]
Oil spiking higher: Oil is the big winner from Putin’s move. Brent Crude has hit $99 and a move above $100 looks to be highly likely now. [Oil positive]
The cryptocurrency hit hard again: Cryptos continues to fall sharply (trading as a risk asset). Bitcoin has fallen over -18% in just 6 days
- US Flash PMIs (at 1445GMT). The Manufacturing PMI is expected to improve slightly to 55.9 (from 55.5) with Services PMIs also up to 52.9 (from 51.2).
- US Consumer Confidence (at 1500GMT). Confidence is expected to drop in February to 110.0 (from 113.8 in January).
- Richmond Fed Manufacturing (at 1500GMT). The survey is expected to improve slightly to +10 in February (from +8 in January).
MAJOR MARKETS OUTLOOK
Broad outlook: Market sentiment is negative but selling pressure for risk assets has eased slightly coming into the European session
Forex: Majors initially reacted late yesterday (JPY and USD positive) but are relatively settled today. It is interesting to see AUD and NZD holding up well still. GBP & CHF are the main underperformers.
- EUR/USD has backed away from the 1.1360/1.1395 resistance area to leave the market in the middle of the trading range between 1.1120/1.1495. Holding above support at 1.1280 maintains a neutral configuration, but a breach of the support and the outlook turns negative for a test of 1.1120/1.1185.
- GBP/USD has backed away from the resistance at 1.3645. This once more reiterates the mini trading range 1.3485/1.3645 of the past few weeks. We, therefore, remain neutral as technical signals on daily and 4-hour charts tail off in their attempted improvement again.
- AUD/USD has maintained its higher lows over the past few weeks. The market is surprisingly even pulling higher to again test the near-term resistance between 0.7225/0.7250. A breakout would open the key medium-term resistance at 0.7315. Momentum continues to improve, but RSI needs to move into the 60s to suggest sustainable positive traction. Initial support 0.7140/0.7150.
Commodities: Volatility remains high. Precious metals had been strong but have now unwound the gains seen in the wake of Putin’s speech. Oil continues to spike higher.
- Gold has been pushing higher towards a test of the $1916 high from May/June 2021 peaks. However, in a fast-moving situation, the price has begun to pull back. Volatility remains elevated. Initial support is $1886. Charts on daily and 4-hour time scales suggest that weakness remains a chance to buy still.
- Silver pushed on in the wake of Putin’s speech but has just begun to pull back in the past hour. Technically, the market continues to find buyers into weakness and the move above $23.99 has opened upside towards $24.70. There is support in the band $23.70/$24.00.
- Brent Crude oil has spiked higher once more and moved above $97.15 (last week’s high) to within reach of $100. The market is trading around levels not seen since 2014. Initial support at $96.45/$97.15.
Indices: US futures are trying to form support but moves remain tentative. European indices are off earlier session lows.
- S&P 500 futures have fallen sharply again overnight but are now trying to form support above the January low of 4212. Technically the outlook is negative and intraday rallies are a chance to sell. However, this is a newsflow-dominated market is will respond to key shifts with elevated volatility. Initial resistance 4313/4354.
- DAX has broken decisively below 15,000. This leaves the market at a near 12 month low. There is also now a huge band of overhead supply 14,810/15,000 to capture technical rallies. This morning has seen a rebound off 14,312 in an oversold rally.
- FTSE 100 has completed a near-term top pattern which implies 7275. However,r the market has engaged in a technical rally today. The reaction around the resistance of the top neckline around 7485/7510 will be key. A failure under here would open the corrective move once more. Initial support is at 7353.