Fed Chairman Jerome Powell is expected to emphasize the uncertainty stemming from the war in Ukraine in Wednesday's congressional testimony, but is unlikely to signal any significant shift in policy, Pantheon Macroeconomics said.
"We expect Mr. Powell ... to state that the Fed will respond flexibly, if required, to changing circumstances," the economic-research firm says. If Powell is asked directly if that means the Fed might skip the expected rate hike later this month, he likely would argue that no advance policy determination has been made, Pantheon said.
"He won't explicitly open the door to the Fed leaving rates unchanged, but neither will he seek to give the impression that it's a done deal," it says.
Forex:
The Ukraine war should keep the dollar lifted and continue to weigh on the euro as the economic impact of crisis will cost Europe far more than the U.S., ING analysts said.
"Indeed, pressure is building for European leaders to bite the bullet and start curtailing Russia's oil and gas imports in spite of the economic cost."
The U.S. economy's relative insulation means the Fed can stick to its monetary tightening plans, they said. The DXY dollar index could rise towards 97.70-98.00 and EUR/USD could fall to 1.10 or lower, the analysts said.
---
The Hungarian forint hits a record low and the Polish zloty falls to a multi-year low despite efforts by the central banks of Hungary and Poland to stem the depreciation of their currencies.
EUR/HUF rises to an all-time high of 382.4460 and EUR/PLN rises to a multi-year high of 4.8217, according to FactSet.
Poland's central bank sold foreign currencies for zloty on Tuesday and Hungary's central bank said it was "ready to act" following the forint's selloff.
The depreciation of central and eastern European currencies are part of a "correlated risk-off move affecting the euro complex" due to the Ukraine war, Commerzbank currency analyst Tatha Ghose said in a note.
---
Sterling looks vulnerable as the market scales back its interest rate rise expectations for the Bank of England amid the Russia-Ukraine crisis, ING said.
Despite the prospect of U.K. inflation accelerating on the surge in energy prices, the BOE's policy tightening cycle has suffered one of the largest market repricings lower, ING analysts said.
Meanwhile, sterling is also sensitive to financial risks and the performance of equities given the size of the U.K. economy's financial sector, they said.
"With European equities remaining vulnerable as the world re-prices European growth, EUR/GBP can bounce around in a 0.8300-0.8400 range--but could break higher if equities take another large leg lower."
Bonds:
Yields on benchmark 10-year Treasury notes edged up to 1.732% before Mr. Powell's testimony, from 1.708% Tuesday.
Lawmakers are likely to press Mr. Powell on the pace of rate increases, the outlook for inflation and potential economic fallout from Russia's invasion of Ukraine. The Fed is widely expected to raise interest rates at its March 15-16 meeting.
However, traders have dialed back expectations of the number of times the Fed will raise rates this year since Russia invaded Ukraine on Thursday. They are pricing in a 6% chance that the bank will raise its benchmark rate to 1.75% or above by the end of the year, according to CME Group, down from 54% a week ago.
---
Massive flight-to-quality moves in government bond markets are evident across currencies and tenors, and the market is convinced that the European Central Bank is about to strike a much more cautious tone at its March meeting, ING's rates strategists said.
The obvious factor behind Tuesday's massive government bond yield slide is a flight to safety as the situation in Ukraine worsens and geopolitical tensions rise, ING's rates strategists said.
In addition, eurozone government bond and gilt markets are re-pricing central bank policy tightening odds, they added.
---
Investor appetite for euro corporate bonds remains weak as Russia's invasion of Ukraine rages, said UniCredit. "As the conflict in Ukraine continues, appetite for European corporate credit risk remains vulnerable," analysts at the Italian bank said.
High-yielding euro corporate bonds are likely to continue to underperform investment-grade senior debt, in line with Tuesday's moves.
---
Investors prefer euro high-quality corporate bonds as uncertainty over Russia's military assault on Ukraine continues, said UniCredit's research team.
Moreover, bond purchases by the ECB continue to support these assets.
The ECB bought EUR1.873 billion of net corporate bonds in the week ending Feb. 25 from EUR 1.439bn in the previous week, showing "stronger weekly purchases," analysts at the bank said.
"This contributed to an outperformance of Corporate Sector Purchase Program-eligible bonds over non-eligible bonds over the past few days," they said.
Commodities:
The oil surge continues, with crude benchmarks rising past the $110-a-barrel level, as traders, banks, and shipping companies steer clear of Russian commodities.
Despite sanctions not targeting Russian commodity supplies directly, the fear of becoming ensnarled in legal issues is making market players reluctant to touch the country's commodities, effectively cutting supplies off from the global market.
"Sanctions have weighed heavily on the banking and financing side, which is reducing trade as banks reduce trade financing involving Russia. Costs are also a factor now as shipping rates surge," the Commonwealth Bank of Australia said.
---
Wednesday's monthly meeting of OPEC+ will be under intense scrutiny, though few expect the oil cartel to veer from a planned 400,000 barrel-per-day increase, given already tight supplies.
"So far, the cartel confirmed that they remain committed to the OPEC+ deal with Russia, and they are not expected to change their production boost plans despite the Ukrainian war," said Ipek Ozkardeskaya, senior analyst at Swissquote, in a note to clients.
"If that's the case, we shall see the positive pressure on oil prices intensify above the $100 per barrel level, and we could see the barrel of US crude advance toward the $125/150 range," said the analyst.
---
Prices leapt in other pockets of the energy market tied to Russia. European natural-gas prices jumped 30%. So far there has been minimal disruption to the pipeline system in Ukraine, through which about a third of Russian gas exports to Europe flow, according to analysts.
OPEC and its Russia-led allies are due to meet Wednesday. Analysts expect them to proceed with a plan to raise production by 400,0000 barrels a day, though many members of the cartel are struggling to meet their quotas.
---
Palladium prices rise to their highest level since August on worries that sanctions on Russia would reduce the supply of the metal. Palladium futures traded in New York are up 4% at $2,640.50 a troy ounce.
They have risen almost 40% so far this year as tensions between Russia and Ukraine built. Russia accounts for around 40% of global palladium supply and a hit to supply now would be bad news for auto makers looking to bounce back from the chip shortage.
"Such supply curtailment would not only coincide with a palladium market deficit of 146koz, but would also occur during a year when auto production is expected to recover as the availability of semiconductor chips and supply-chain challenges improve," Fitch Solutions said.
---
The effect of the war in Ukraine on energy prices is likely to be felt the most in Italy and Spain than in Germany and France, Capital Economics said.
The recent increase in gas prices is set to push inflation up further in the eurozone, but the effects in Italy and Spain are likely to be bigger because changes in wholesale prices are quickly reflected in households' energy bills, the economic-research firm said.
"As a result, we think that headline inflation will be higher this year in Italy and Spain," CE said. Germany isn't far behind due to the strength of core inflation, while France should have lower inflation as government measures keep household energy bills down.
EMEA HEADLINES
Ukraine's Kharkiv Front Line Holds Despite Russian Bombardment
KYIV, Ukraine-Russian forces resumed airstrikes on central Kharkiv, Ukraine's second-largest city, and continued pounding other cities as they sought to break the will of Ukraine's resistance on the seventh day of the war unleashed by President Vladimir Putin.
Kharkiv's police headquarters and the nearby university building were severely damaged and caught fire. There was no immediate word on casualties. Several residential areas of Kharkiv were hit overnight and Russian forces attempted to seize the city's military hospital, local authorities said. However, the front line held and the city of 1.4 million people remained under Ukrainian control, they said.
Oil Tops $110 as Russia Struggles to Maintain Energy Sales
Benchmark global oil prices surged above $110 a barrel, hitting a multiyear high, as concern mounted that Russia's growing economic isolation since its invasion of Ukraine would disrupt global energy supplies.
The latest run-up came even after members of the International Energy Agency agreed Tuesday to release supplies from their oil reserves, and despite efforts by Western governments to exclude oil and gas from their sanctions on Russia.
Eurozone Inflation Climbs to Fresh High as Russian Invasion Confronts ECB With Dilemma
The eurozone's inflation rate jumped to a new high in February, presenting the European Central Bank with a difficult choice between supporting flagging growth and clamping down on accelerating prices driven by the threat to energy supplies following Russia's invasion of Ukraine.
(MORE TO FOLLOW) Dow Jones Newswires
03-02-22 0643ET
