Market snapshot, theatre of war
Since the Russian army’s full-scale invasion of Ukraine on 24th February most equity markets, government and corporate bond yields, commodity prices (energy, metals and agriculture), CDS spreads and major currencies have recorded significant intra-day volatility and outsized daily moves.
Moreover, for all the “noise”, the current geopolitical crisis has accentuated multi-week trends in a number of financial market and economic variables. Price of Brent crude oil, natural gas and gold has risen sharply and global equities have continued to tumble.
The Dollar – which market-to-market was broadly unchanged between 13th January (its 2-month low) and 23rd February – has since appreciated to a 17-month high. The previously unremarkable and normally risk-sensitive Australian and New Zealand Dollars have outperformed all major currencies (bar the Colombian Peso). Conversely, already underperforming European currencies – namely CE3 currencies, the Swedish Krone and Euro – have depreciated sharply against the US Dollar.
However, and just as notably in our view, the S&P 500, which fell 11.9% between 3rd January (record-high) and 23rd February, has since weakened only 0.6%.
The market’s pricing of Federal Reserve rate hikes at its 16th March policy meeting has been stable around 25bp so far this month. US 2-year Treasury yields have been range-bound around 1.5% in the past month.
Russian Rouble has collapsed but other high-yielding Emerging Market currencies have as a whole fared reasonably well. Beyond Central European currencies there has so far been limited currency contagion within the EM space.
Most major Asian currencies in the past fortnight have, mark-to-market, either been broadly unchanged or only depreciated modestly against US Dollar.
Financial markets are being light-footed, which has generated much intra-day and daily volatility, but are seemingly not always prepared to take medium-term directional positions at this current and extremely uncertain juncture.
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Olivier is an economist and rates & FX strategist with over 22 years experience in financial markets. He is Director and Founder of 4X Global Research, an independent, London-based consultancy which provides institutional and corporate clients with substantive research, high-quality analysis and insight on emerging and G20 economies and financial markets.