European markets have continued to build on their gains from last week, with the DAX leading the way and the FTSE 100 lagging, on optimism over the progress in ceasefire talks currently taking place between Ukraine and Russia, and which are due to resume tomorrow.
Europe
While welcome, today’s optimism conveniently ignores the escalation of hostilities by Russia over the weekend in hitting new targets in Ukraine, near the border with Poland.
There is certainly an element of hoping for the best in today’s firmer tone, which seems to fly in the face of the reality on the ground and that for a sustained end to hostilities to take place, one side or the other will have to back down quite significantly. For a start Ukraine is likely to insist that Russia would need to withdraw a lot of its troops, while Russia’s continued actions inside Ukraine don’t speak to a mood of compromise. Consequently, the current rebound is likely to remain quite fragile in nature.
We’ve seen some decent gains for house builders today over reports that the final bill for dealing with the cladding crisis may well be much lower than initial estimates. The weekend report from the Telegraph suggested that the overall cost may well be a quarter of the cost of initial estimates of £4bn, with the likes of Persimmon, Taylor Wimpey, Berkeley Group and Barratt Developments all higher.
Financials are also outperforming on the back of some steep rises in bond yields, ahead of this week’s central bank meetings from the Federal Reserve, Bank of England and Bank of Japan, with decent gains for the likes of Lloyds Banking Group, Barclays and NatWest Group.
On the downside we’re seeing weakness in the basic resource and energy sector on the back of headlines from China which has seen the authorities announce a full-scale lockdown of Shenzhen, a region of almost 20m people, due to surging Omicron infections.
This lockdown is likely to see wholesale disruptions to economic activity across the region, and a sharp slowdown in demand. With China showing little sign of dropping its currently hard line zero covid strategy, it is becoming increasingly concerning that the country might not be able to hit its 5.5% annual GDP target. Because of this, and weakness in copper and other metals prices we’re seeing the likes of Anglo American and Glencore slip to the bottom of the FTSE 100, along with BP and Shell.
On the plus side today’s sharp fall in oil prices looks set to offer a temporary respite to beleaguered consumers here in Europe, as well as the US, as they worry about the recent surge in energy prices on their disposable incomes.
US
US markets have taken their cues from the positive session here in Europe, opening modestly higher, however the weakness seen in Chinese markets has seen the tech sector lag with the likes of Alibaba, Tencent and JD.com sliding back sharply.
Apple shares have also come under pressure due to the lockdown in Shenzhen, and the suspension of all non-essential business activity, as investors absorb the fact that Foxconn, which is one of Apple’s key suppliers, is located there, and is set to remain closed until further notice.
FX
It’s been a mixed session for the US dollar, gaining against the likes of the Australian dollar on the back of the weakness in commodity prices, as well as the Japanese yen, as US 10-year yields hit their highest levels since 2019. The rise in yields is particularly notable ahead of this week's Fed meeting given concerns that while rates will rise by 0.25% this week, we could see fairly hawkish guidance on the pace of future rate increases given how far behind the curve the US central bank is. The rise in US yields across the board has also helped to push the US dollar to its highest levels against the Japanese yen since December 2016, when it traded as high as 118.65.
The euro is also outperforming after the ECB surprised the markets last week with an unexpectedly hawkish pivot, when it comes to its own tapering programme.
The Swedish krone is also seeing a significant rebound after headline CPI surged more than expected in February to 4.5%, and a new 28 year high, raising the prospect of much more aggressive action by the Riksbank when it comes to interest rate policy later this year.
Commodities
Brent crude oil prices as well as US oil prices have continued to fall back with the declines being accelerated by events in China and the lockdown in Shenzhen. This has raised concerns that this will make the various global supply chain disruptions even worse, and that is a valid point, however these concerns are being outweighed by the reluctance of EU countries to suspend imports of Russian crude oil.
The flip side of a China slowdown does have a positive aspect to it if you’re an energy consumer in that global demand for oil and gas is likely to slow as economic activity in China slips back, meaning more supply for everyone else..
Gold prices have also come under renewed pressure sliding to a one week low, on the back of the sharp rise being seen in US yields, and ahead of this week’s Federal Reserve rate meeting.
Palladium prices have also plunged, sliding to their lowest levels this month, and down over 25% from last week's record high at $3,420.
Volatility
Last week saw more extreme volatility, driven largely – although not exclusively – off the back of the escalating situation between Russia and Ukraine.
London-listed Russian stocks have unsurprisingly continued to struggle, with many being suspended from trade completely, although Polymetal made some attempt at a recovery, adding more than 50% from the weekly lows. Volatility however remains very much exaggerated, with the daily print last Monday breaking above 1,000%, whilst monthly vol sat at 470%.
Looking slightly beyond the conflict, earnings news also proved instrumental in driving price action over the week, with Greggs being pushed into the spotlight as daily vol exceeded 250% on both Tuesday and Wednesday against monthly vol of around 120%. Of course, one of the drivers here was concern over rising input costs, and with both Russia and Ukraine being major exporters of wheat, an impact on flour prices in the coming months seems inevitable.
Straddling both stocks and indices, speculation that US regulators may be clamping down on some dual China-US listings drove price action in a number of these stocks at the end of the week and also initiated some marked selling on the China A50 index, too, where daily vol reached 67% on Thursday, up from a monthly print of 36%.
Action among fiat currencies remained dominated by the dollar/rouble pair where daily vol ranged between 500% and 800% over the week, whilst other Eastern European currencies also saw heightened levels of activity, albeit at a far lower level. Signs of a recovery rally for the likes of the Forint, Koruna and Zloty again saw daily volatility elevated here to around the 30-40% mark.
In terms of commodities, again it has been Russia driving the agenda here, although an increase in two-way flow has provided some welcome relief. In the latter part of the week, UK gas oil was very much in focus after the underlying price reversed by almost a third, lifting daily vol to 186% on Thursday against a monthly print of 93%. Soft commodities were also on the radar as wheat gave back some recent gains, pushing daily vol on the US cash contract to 300% on Wednesday, up from 125% on the month.
Rounding out with cryptos, despite bitcoin’s recovery, volatility here has been comparatively subdued, sitting around the 70% mark on both the daily and monthly print all week, although activity was rather more upbeat amongst alt-coins.
