In a week that saw significant volatility and headline risk, European markets broke a run of three successive weekly declines, despite the horrors being played out in Ukraine by Russian forces. US markets, on the other hand, did not, closing lower, with the Dow posting its fifth successive weekly decline.
Some of last week’s rebound for markets in Europe was because of some fragile optimism that Russia-Ukraine peace talks might actually lead somewhere, however this optimism is slowly turning into a realisation that the gap between the two parties is too wide to bridge.
The sad reality is that any ceasefire remains some way off, with Russia’s behaviour over the weekend pointing to increasingly desperate measures to crush Ukrainian morale by a campaign of indiscriminate bombing, as they widened their target area to parts of western Ukraine. There is also a concern that any new Russian measures might include the use of biological and, or chemical weapons.
Away from events on the ground in Ukraine, market attention is also turning to the probability of a Russian default as its economy takes a hammering from sanctions. Russia is due to make payments on some of its debt later this week with ratings agency Fitch expecting to see an “imminent” default, which could trigger a chain of other defaults.
As we look ahead to another week of significant volatility, European markets look set to open higher, despite an Asia session that has seen the Nikkei move higher, but Chinese markets got hammered as China battles its biggest covid wave since March 2020.
One silver lining from last week was the fact that we saw a softening in commodity prices, in a week that saw crude oil prices post their biggest weekly drop since November, despite hitting their highest levels since 2008. Wheat prices also saw a big weekly fall – the biggest in over a decade, despite also posting a new record high. This trend of weaker prices has continued in Asia markets this morning.
In a week that has seen prices across the commodity complex post multi-year, as well as new record highs, concerns over rising prices, and whether they are transitory or not has been increasing, against a backdrop that central banks are way behind the curve. This shift in thinking has been particularly notable in the last six months, as the realisation dawns that the transitory narrative is dead in the water and has been for some time.
Last week's inflation numbers, from the US and Europe, also appear to suggest even worse is to come, as we look ahead to this week’s meetings of the Federal Reserve, Bank of England, and Bank of Japan. A few days ago, the European Central Bank more or less threw in the towel on their belief that inflation was transitory by upgrading their inflation forecasts and announcing the likely end of their asset purchase programme by the end of Q3.
This week we can expect the Federal Reserve to embark on their own tightening regime by raising rates by 25bps, followed by the Bank of England who look set to do the same, for the second meeting in succession, and the third rate rise in a row. The Bank of Japan will probably do nothing this week.
EUR/USD – last week’s failure at the 1.1100 area has seen the euro slide back. The move below the 1.0970 area opened up the risk of a return to the 1.0800 area, and trend line support from the 2017 lows. Below 1.0780 opens up the risk of a move towards 1.0600.
GBP/USD – last week’s break below the 1.3160 area opens the risk for a move towards 1.2800. We need to get back above the 1.3200 area to stabilise and retarget 1.3450.
EUR/GBP – squeezed all the way back to the 0.8435 area, and 100-day MA, before slipping back. A fall below the 0.8370 area is needed to undermine the current rebound and could see a move back to 0.8320.
USD/JPY – moved through the 116.30 area and now has the potential to target the December 2016 peaks at 118.65. Only a move back below 116.20 undermines this scenario and argues for a move back to 115.40.
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