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Europe set to open higher, after US market turnaround

NYSE trading floor

Yesterday saw the beginnings of a bleak and sober period for Europe, after Russia ripped up the international rule of law, and invaded its smaller neighbour Ukraine, in a day which saw European markets plunge.

US markets started the day in a similar vein, as the UK announced a widening of sanctions against the Putin regime, including the freezing of assets of all major Russian banks, and the blocking of those banks to be able to access sterling, and clearing of payments in the UK.

The UK also banned all Russian companies from raising finance in London, with Belarus also facing the same fate. More than 100 individuals will also face asset freezes, while high tech components for export destined for Russia will also be blocked.

With the US following suit with similar measures, cutting Russian banks off from the US financial system, the EU appears to be still some way away from following in the footsteps of the UK and US.

The EU is still expected to follow suit with a raft of similar measures, however these still have to be fully agreed upon, although it seems the nuclear option of shutting Russia out of the Swift payments system isn’t yet on the table due to push back from Germany, Italy, Hungary and Cyprus. The UK and US do appear to be in favour of this option but given that Swift is based in Belgium and subject to EU law the mechanics of doing it are proving to be problematic

While the sanctions set to be imposed are on a significantly stronger scale than any previous ones announced, they are unlikely to be enough to change Putin’s calculus in the short term, given that Russia’s energy markets, along with other key exports, and access to Swift were left out.

This perhaps helps explain why US markets reversed course after European markets closed, to finish the day strongly higher, with the Nasdaq 100 leading the way with a gain of over 3%, only hours after having been down 3%, soon after the market opened.

There could also be a geographical element in yesterday’s rebound, with the perception that US companies might be better insulated from events that are currently taking place in Europe.

Yesterday’s surge in oil prices up to $105 a barrel also proved to be short-lived, as prices slid back after it became clear that the sanctioning of exports of Russian energy were also off the table for the moment, although prices are still elevated, with Brent back above $100 a barrel, while agricultural commodities like corn and wheat also continued to rise.

The late rebound seen in US markets yesterday is expected to see markets in Europe open modestly higher this morning, however upside is still likely to remain limited while the fighting in Ukraine continues, and uncertainty over future sanctions remains.

On the data front we have some important US inflation data, although recent events appear to have altered the calculus when it comes to a Fed rate rise next month, in that a 50bps hike has become much less likely.  

With the release of the latest Fed meeting minutes, it was clear there was a quorum of Fed policymakers who were reluctant to consider anything other than a 25bps hike in March.

The debate has moved on quite a bit since those minutes, with US CPI at 7.5%, and US PPI also sharply higher, which means today’s Fed’s preferred measure of inflation, the core PCE deflator, will see a similarly sharp move upwards. In December this rose from 4.7% in November to 4.9%, just falling shy of 5%, a level that is highly likely to move above when today’s numbers are released. We’ve already seen a number of Fed policymakers express concern that inflation is running out of control, and the recent January numbers are only likely to have amplified those concerns. Add in a strong January jobs report, and retail sales number, and it is clear that the US economy is doing well.

As such there would have been increasing speculation that the Fed might need to lean towards a 50bps hike when they next meet in March. A strong number here would only increase that anxiety, although with the situation in Ukraine as it is now, would the Fed really go with such a significant move on rates, even if PCE inflation came in ahead of forecasts.

We’ve also got the latest personal income and spending numbers for January which are both expected to show a decent increase of 0.5% respectively.    

EUR/USD – slid back to 1.1107 and the lowest level since May 2020 before rebounding, however the bias remains for lower levels. A break below 1.1100 argues for a move towards 1.1000. Now have resistance at the 1.1270/80 area. 

GBP/USD – broke below trend line support at 1.3460 falling to 1.3273 before rebounding. Bias remains for further losses towards 1.3160 while below the 1.3460 area.

EUR/GBP – fell back to the 0.8300 area, but failed to push through, prompting a rebound back to 0.8380. Still range trading with resistance at the 0.8410/20 area. The bias remains for a move back towards the recent lows at 0.8280.

USD/JPY – slid back to 114.40 before rebounding back higher. We appear to have solid support at the 114.40/50 area, and resistance now back at the previous highs at 115.80.

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