MARKET WRAPS
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No major data scheduled; Joe Biden delivers State of the Union address; updates from Volkswagen, IAG, Sberbank, VEON, Harmony Gold, Bunzl, Associated British Foods, GlaxoSmithKline
Opening Call:
Stocks in Europe and the U.S. look likely to tumble as investors continue to grapple with geopolitical developments including new sanctions by Western countries against Russia. In Asia, stocks were mixed with any losses largely contained. Elsewhere, oil prices rose more than 6%, with the safe havens of bonds, the dollar and gold all gaining.
Equities:
European and U.S. stock-index futures plunged Monday, after Vladimir Putin raised Russia's nuclear alert level following stinging new sanctions from the West over the Russian invasion of Ukraine.
Chaos is expected in Russian markets when they open after the U.S. and its allies on Saturday vowed to remove major Russian banks from the SWIFT interbank messaging network, effectively cutting them off from the global financial network. Some experts speculated about runs on Russian banks.
Tensions between Russia and the West ratcheted even higher Sunday after Putin put Russia's nuclear forces on red alert in response to what he called "aggressive statements" by NATO. Meanwhile, Ukrainian forces continued to put up stiff resistance to Russian invaders, and Ukraine agreed to meet with Russia in Belarus for talks, though hopes for a quick resolution to the conflict appear slim.
"As we continue to isolate Russia because of their actions, there will be some turmoil in the markets," said Jerry Braakman, chief investment officer at First American Trust. "The more we broaden those sanctions out, it has an impact."
Investors are concerned that sanctions will weigh on markets and the economy, said Mohit Bajaj, director of exchange-traded fund trading solutions at WallachBeth Capital.
"They're worried that this is going to be a long term effect on the market," he said. "Usually when sanctions happen it becomes months down the road, it's not as if they put it on for a week or two."
Stocks to Watch:
BP said Sunday it will exit its nearly 20% stake in Russian government-controlled oil producer Rosneft, days after it was pressured to unload the holding by U.K. officials amid Russia's invasion of Ukraine.
The British energy giant faces a potential loss of as much as $25 billion-encompassing the maximum possible impact of selling the Rosneft stake, valued at $14 billion, plus a big expected charge related to foreign-exchange losses. Currently, BP relies on Rosneft for roughly one-third of its oil-and-gas production.
BP Chief Executive Bernard Looney and former CEO Bob Dudley will resign from Rosneft's board.
Economic Insight:
A closer trade relationship with China could offer Russia some help amid U.S. and EU sanctions, but it's not likely to fully offset the impact of increasing decoupling from the EU, said Natixis.
"The rise of Chinese exports to Russia are significantly smaller than the decline of EU's exports to Russia over the past few years, implying that the substitution will not be full either," Natixis said in a note.
For Russian exports, which are heavily concentrated on oil and gas, it will be much harder for Russia to shift from the EU to China in the short run, given that the former is much larger than the latter, Natixis said.
Forex:
The dollar and yen strengthened in Asia on fresh safe-haven demand.
Futures for the Russian ruble declined 19%, suggesting the currency would trade at about 109 rubles per dollar. The ruble will hit a record low if it trades at 90 rubles or more per dollar.
However, there were suggestions there is an unwillingness on the part of market participants to quote a price in the currency.
One senior forex strategist said he suspects there is no proper market, with some banks locked out of Swift. With severe sanctions being applied to Russian banks and the country's central bank, expectations are high that the ruble will be dumped with force when liquidity returns.
Bonds:
The yield on the benchmark 10-year Treasury fell back below 1.9% on the flight to safety in Asian markets.
Treasurys had sold off Friday after news reports indicated Moscow was open to holding talks with Kyiv, but Russian forces continued to press forward toward Ukraine's capital.
Friday's moves came as the Fed's preferred measure of inflation rose by 0.6% in January and showed the biggest yearly increase since 1982.
Market-based projections point to a 100% chance the Fed will begin to hike benchmark interest rates next month.
"While turmoil in markets calls for a cautious policy stance from the Fed, rising inflation risks suggest otherwise," said Subadra Rajappa, head of U.S. rates strategy for Societe Generale.
"There is little change in the market pricing of hikes, although flatter curves imply a slower growth trajectory. In the U.S., we recommend going long duration and long 10y TIPS breakevens to hedge further escalation of geopolitical risks," Rajappa wrote in a note.
Other News:
S&P on Friday said it was revising its outlook on Austria to positive and affirming the country's 'AA+/A-1+' ratings. S&P said the revised outlook reflected its view that "Austria's economic growth outlook should remain broadly resilient over 2022-2025."
S&P said it expects Austria's economy to grow 4.1% this year, and grow 1.7% during 2023-2025 "on the back of robust domestic demand."
S&P also said it expects faster budgetary consolidation in Austria, adding it sees the country's budget deficit at about 0.8% of GDP by 2025. S&P said its outlook signifies "we could raise our rating on Austria within the next 24 months if its budgetary performance improves beyond our current expectations."
Energy:
Oil prices jumped again as the latest sanctions by Western nations against Russia exacerbated concerns over supply.
In very short term, Goldman Sachs sees risks skewed to significant further upside for oil and raised its one-month Brent forecast to $115/bbl from $95/bbl.
Metals:
Gold futures climbed, along with prices of aluminum and nickel.
Investor sentiment has been hit by fears that sanctions against Russian lenders could weigh on physical commodity markets as Russia is the world's third largest producer of aluminum and nickel, said ANZ.
Other Commodities News:
Goldman Sachs said commodity prices have upside potential amid the ongoing Ukraine invasion.
"We expect the price of consumed commodities that Russia is a key producer of to rally from here." These include crude oil, natural gas, palladium, nickel, wheat, corn. Higher gas prices would then have a knock-on effect on aluminum as well, since it is an energy-intensive metal, Goldman Sachs said.
"In the case of agricultural prices, this reflects the fact that Russia and Ukraine represent nearly a quarter of global wheat and corn exports in the face of already tight inventories."
TODAY'S TOP HEADLINES
Ukrainian Forces Hold Kyiv as Talks With Russia Are Planned
KYIV, Ukraine-Russian and Ukrainian officials prepared to meet for the first talks since Moscow began its invasion four days ago, as Ukraine's defenders held on to the capital, Kyiv, and pushed back Russian troops in urban combat in its second-largest city, Kharkiv.
In a sign of growing tensions with the West over Ukraine, Russian President Vladimir Putin ordered the country's nuclear-deterrence forces to be put on alert.
Car Parts, Chips, Sunflower Oil: War in Ukraine Threatens New Shortages
Russia's invasion of Ukraine is piling new troubles onto the world's already battered supply chains. The fighting has shut down car factories in Germany that rely on made-in-Ukraine components and hit supplies for the steel industry as far as Japan. It has severed airways and land routes that had become crucial since the pandemic began gumming up sea trade.
The conflict is also bottling up Ukraine and Russia's vast commodity exports, sending the price of oil, natural gas, wheat and sunflower oil rocketing. Shipping from Ukrainian ports, an important corridor for grain, metal and Russian oil shipments to the rest of the world, has all but ceased.
High Food Prices to Pressure Inflation This Year
Rising food prices are emerging as a significant headwind to the economic recovery from the pandemic this year, particularly in developing countries where food accounts for an important share of household consumption. Russia's invasion of Ukraine could make those headwinds even stronger.
The price of basic staples such as wheat, corn and soybeans rose steeply last year, which would translate into higher grocery prices world-wide this year, economists said. Consumer food prices tend to lag behind commodity prices by several months. Even if food commodity inflation slows, as many forecasters expect, households will still face higher grocery bills in the months ahead.
Russia Sanctions Over Ukraine Largely Spare Energy Sector, Vital to Europe
The West is rolling out increasingly tough sanctions on Russia but it is going out of its way to preserve the country's biggest source of revenue: energy exports.
In the latest example, the European Union said late Saturday that it had agreed with the U.S., the U.K. and Canada to eject some of Russia's banks from the global financial system's payments infrastructure, Swift. The move, if applied to all banks, would be powerful, essentially blocking money transfers in and out of the country. By cutting only some, Western countries are allowing payments, including for energy, to continue through non-sanctioned banks.
Ukraine Crisis Upends Investing Playbook for 2022
Global markets for everything from stocks to oil to wheat are recording some of the most extreme price swings in decades, a sign of investor unease over unpredictable economic and political dynamics.
(MORE TO FOLLOW) Dow Jones Newswires
02-28-22 0015ET
