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European stocks shrug off Putin escalation threats

Russian President Vladimir Putin

European markets initially started the day on the back foot after Russian President Vladimir Putin announced he would be taking steps to mobilise 300,000 reservists after recent losses, as well as reminding everyone that Russia did have the option of using nuclear weapons if its territorial integrity came under threat.

Europe

European markets initially started the day on the back foot after Russian President Vladimir Putin announced he would be taking steps to mobilise 300,000 reservists after recent losses, as well as reminding everyone that Russia did have the option of using nuclear weapons if its territorial integrity came under threat.

As an exercise in upping the ante it’s a notable intervention, but it’s also a reminder of how badly the war is going for Russia, and the current gains being made by Ukrainian forces at Russia’s expense. Let’s face it if the war was going well for Russia the subject of nuclear weapons wouldn’t even be on the table.

The early losses didn’t last as markets slowly clawed their way back into the black as investors looked to the Federal Reserve, and the prospect of a 75bps rate hike, while also acknowledging that this isn’t the first time Putin has played the nuclear card, and probably won’t be the last either. 

London markets have seen decent gains for some sectors after the UK government outlined a package to help businesses with energy costs over the winter period. Bills would be limited to £211 per MWH for electricity and £75 per MWH for gas between 1st October 2022 to 31st March 2023, well over half from where they are now. 

We’ve also seen gains in defence stocks in the wake of this morning’s threats by Putin, with BAE Systems near the top of the FTSE100, while Chemring and QinetiQ are also higher.

House builders have received a lift on reports that we might see a cut in stamp duty later this week when the mini budget is announced, with Persimmon, Taylor Wimpey and Barratt Developments rebounding modestly after yesterday’s steep losses. Today’s rebound is still modest compared to the losses we’ve already seen this year, as well as this week. Ultimately the devil will be in the detail, however even if it does come to pass, the other side of that is that with interest rates set to rise as well as the rising cost of living its unlikely to be a game changer.

Banks have underperformed on reports that the UK government is looking at scrapping the interest paid to banks held on certain commercial deposits held at the Bank of England. Barclays, Lloyds and NatWest Group have all slipped back.        

US

The rebound off today’s intraday lows for European markets has seen US markets open higher in the wake of yesterday’s losses, as we look towards tonight’s Federal Reserve rate meeting where it is expected the US central bank will raise rates by 75bps. There is some speculation that the Fed might move by 100bps but that seems unlikely. What they have to say in the wake of the decision, along with economic projections is likely to be more important in terms of where they see rates 12 months from now and beyond.

A 75bps move could see a market rally on relief the Fed didn’t go down the 100bps route, however the acid test is what markets do once 24 hours has elapsed and everything else about the decision has been dissected and analysed.

FX

The US dollar has edged up to its highest levels in over 20 years ahead of today’s Fed meeting, although the reason for the gains is less about the strength of the US dollar, than the weakness in the euro and Swedish krona in the wake of this morning’s mobilisation of reserves by Russian President Putin, and dark threats about “nuclear blackmail”.

The pound also slipped to a new 37-year low against the US dollar just above 1.1300, with the prospect of more to come as the Fed gets set to hike today, and the Bank of England tomorrow.

It’s set to be a crucial 24 hours for the UK central bank as it looks to navigate a path through a weakening economy, rising prices and a weakening currency. With its credibility at very low levels the bank needs to somehow reset the agenda when it comes to its stewardship of the economy. For too long the bank has been perceived as being soft on inflation, even as it became the first to start raising rates its response since then has been timid. 

Commodities

Crude oil prices have edged higher in the wake of this morning’s hawkishness from Russia, however once again progress has been difficult, as recession concerns dominate.

UK natural gas prices have also struggled despite the escalation in rhetoric which in a sense is encouraging given that it implies prices are resetting to a more stable.

Gold prices have stabilised ahead of today’s Fed decision with a backing up in yields also helping to pull the yellow metal off away from its 2 year lows.

Volatility

London’s FTSE-100 saw some meaningful gains in early trade yesterday before staging a prompt reversion, leaving the index to range by more than 2% during the session and driving volatility higher as a result. With some big political announcements expected this week, culminating in Friday’s mini budget, this could well remain a turbulent trade in the coming days but on Tuesday it was one of the most active equity indices with daily volatility coming in at 17.6% against 15.97% on the month.

Raw sugar prices tested fresh lows for the year on Monday before rebounding. There had been some comments made regarding future production surpluses out of Brazil and this appeared to be aiding on the downside, but profit takers do seem to have paused for breath, Daily vol printed 33.56% against 31.6% on the month.

Crypto volatility remains elevated although the asset class is still something of a mixed bag. Bitcoin saw recent gains unwind, with daily vol advancing to 64.22% against 49.08% on the month, whilst Stellar hit fresh one-month highs, driving daily vol to 66.43% against 49.55% for the month.

Finally in equities, share in The Hut Group fell back again yesterday as the market continues to digest last week’s disappointing results. With the underlying.

 

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