European markets haven’t received much love this Valentine’s Day, with the DAX falling to an eight-month low, while the FTSE 100 has seen its second biggest one day fall this year, driven largely by declines in travel and leisure, as well as banking stocks.
Today’s falls have largely come about as a hangover from the late falls seen in the US on Friday, as well as heightened concerns over the direction of travel with respect to events on the Ukraine-Russia border. Talk that there is a “whiff of Munich” about recent events has certainly raised the temperature and also raised fears that whatever steps are taken to avert a conflict, that war is coming and it’s really all about timing than anything else. Of course, there is a counter argument that in raising the stakes in this way, it could concentrate minds more fully so that a satisfactory compromise can be reached on all sides and help head off a conflict that will damage everyone.
Whichever way the chips fall, airlines have come under the most pressure, with British Airways owner IAG leading the fallers, although Wizz Air has also seen steep falls giving its broader exposure to Eastern Europe.
Banks have also taken a bit of a kicking, after decent gains year to date, largely down to an inversion of the yield curve, as 5-year gilt yields fall below 2-year gilt yields, although we have been here before in the second half of 2019, and the beginning of 2020. Typically, a yield curve inversion is a forerunner, or warning of a possible recession, and while higher yields are widely seen as a good thing, if there is little difference between short- and long-term rates then banks’ ability to make a decent return is hindered. Barclays, NatWest and Lloyds Banking Group are all lower.
Evraz shares opened sharply lower from Friday’s close mainly due to the demerger of its coal assets which were consolidated under PJSC Raspadskaya and which took place today. The demerger meant that eligible Evraz shareholders would receive 0.425548 Raspadskaya shares for every share held or receive a cash payment equivalent. Putting that to one side the shares are higher on an adjusted basis, largely due to the rise in the gold price, which has also seen Fresnillo rise to the top of the FTSE 100.
US markets have picked up where they left off on Friday, as the weak tone from Asia and Europe, has bled into a moderately negative open, although they have recovered off their pre-market lows after Russian President Vladimir Putin gave his approval to further diplomatic overtures in a meeting with his foreign minister Sergei Lavrov.
This approval also helped pull US yields sharply off their lows of the day, although they were also given a nudge higher by St. Louis Fed President James Bullard who reiterated his views from last week that the Federal Reserve should raise rates by 50bps hike in March, with two more of 25bps each by July. It is clear, however, that he doesn’t have the support of the rest of the FOMC, given his comments that he needs to convince his colleagues of the merits of this approach.
It also begs the question as to why he gets so much airtime for someone who appears to have a minority view on the FOMC. Perhaps we’ll get a counter narrative later this week, from the likes of Kashkari, Mester and Evans on Wednesday and Thursday.
On the companies front Peloton shares have drifted back after new CEO Barry McCarthy ruled out the prospect of a sale despite the recent speculation that has seen the likes of Apple, Amazon, Nike and Disney all variously linked with the troubled business.
The US dollar has continued to build on its gains from last week hitting its highest level this month earlier today. The euro has remained under pressure given its proximity to concerns over events in Ukraine and the uncertainty there. Sentiment isn’t being helped by further sharp upticks in energy prices, which Europe is particularly exposed to. The Japanese yen and Swiss franc are the only other currencies that are managing to hold their own against the greenback given their traditional role as safe haven currencies.
Brent crude oil prices initially took another leg higher in early trade edging ever closer to that symbolic $100 a barrel oil mark. We’ve since seen prices slip back, as concerns about disruption to supplies prompted by conflict, push up against the reality of higher prices killing demand. The rise in oil prices is also causing concern amongst some OPEC members who fear $100 oil could impact demand and cause a sharp slowdown.
As you would expect with the heightened geopolitical risk, gold prices have hit their highest levels since last November, in a move that could well see it move higher unless tensions start to show signs of easing. In the short term that doesn’t seem likely given the number of Russian troops currently in place. While Russia has continued to push back on claims it is getting ready for an incursion their actions appear to run counter to that, and that is likely to be broadly supportive in the short to medium term.
There wasn’t too much of a pattern to be seen in terms of increased volatility across single stock CFDs last week, although two companies that did stand out were Peloton and Ocado. Both fared well from COVID lockdowns but over the last few months have seen notable declines from recent highs. This week however Peloton jumped – albeit briefly - following news of cost savings and that the CEO was to be replaced. That lifted one-day vol to almost 300%, up from monthly averages of around 225%. Ocado also slumped off the back of its results, but bargain hunters were seen to be moving in, looking at the technology potential rather than the direct retail side of the business. One day vol here got to 126% against a monthly reading of around 76%.
Crypto volatility remains comparatively subdued after the quiet start seen to the month. Price action is however recovering here and ETC – ethereum classic – was a standout on the week, being flagged for high vol on four days out of five. The asset topped out at 112% on Friday, up from a monthly average of around 90%.
Oil prices were pushed into focus again, most notably around mid-week when a bigger than expected draw of crude oil was noted in the US inventory figures. As a consequence, the US crude oil contract printed one-day vol of 36% on Wednesday. In terms of softs, it was OJ that stood out, with citrus harvest forecasts from Florida painting a bleak picture and driving underlying prices significantly higher. One day vol topped out at almost 109% on Monday, up from the monthly reading of 85%.
As for fiat currencies, the rouble remains active amidst those ongoing concerns over Moscow’s intentions towards Ukraine, but the Polish zloty and Hungarian forint are also finding two-way price action. Inflation is resulting in fairly aggressive central bank policy reactions, but these risks are countered by the fact both nations share a border with Ukraine. Against the greenback on Friday Rouble vol hit 24.9%, the Forint got to 17.4% and the Zloty 16.2%.
Looking into this week, expect those Eastern European currencies to remain active amidst the geopolitical situation. That also has the potential to spill into oil and gas markets, whilst the release of RBA meeting minutes is likely to drive interest in the Aussie dollar as this ought to help refine guesses over the timing of that rate hike.