MARKET WRAPS
Stocks:
European equities fell more than 2% as concerns mounted about Russia's intensifying military campaign in Ukraine.
News of damage to a major Ukrainian nuclear-power plant rattled already fragile sentiment. Market participants are trying to assess how much the conflict, and tough Western sanctions on Russia, will damage global economic growth and further stoke inflation by disrupting commodity supplies.
Word from Ukrainian officials that the fire was outside of a critical zone for the reactors, and had been put out, helped calm investors' shaken nerves somewhat and returned some normalcy to markets.
But the situation does "highlight another serious risk factor surrounding the Russian invasion of Ukraine," said Jeffrey Halley, an analyst at broker Oanda. Russia's tactics seem to be shifting, and the attack on Zaporizhzhia suggests that Moscow isn't beyond tactics that put wider Europe at risk.
"Prevailing winds in the area run from east to west across some of Ukraine's most important agricultural production areas, and into Western Europe," Halley added. "It doesn't take a genius to extrapolate the potential risks associated with that scenario."
In the day ahead, investors will closely watch the U.S. jobs report for February, which is a key piece of economic data ahead of the Federal Reserve's meeting this week on whether, and by how much, to tighten monetary policy.
Between Ukraine and the jobs report, it could be a volatile end to a volatile week.
"Nobody will want to be short risk going into this weekend," said Halley. "I believe any rallies in equities, dips in the U.S. dollar and Treasuries, and dips in gold, will be short-lived."
Stocks to Watch:
Bryan Garnier has lowered its rating on Zalando to neutral from buy, trimmed its estimates for the year and cut its target price to EUR90 from EUR107, saying the e-commerce company lacks momentum, with 2022 guidance marked by uncertainty and a reliance on growth in the second half of the year.
Zalando guided for continued growth in revenue and gross merchandise value in 2022 but Bryan Garnier said the targets are unusually wide, noting that this is likely due to a lack of visibility over consumer sentiment, supply, and inflation in the fashion sector. The guidance is moreover loaded to the second half, with the first quarter likely negative and a lack of momentum generally in the first half.
European Central Bank
Morgan Stanley expects the ECB to adjust the hawkish tone adopted in February, when it meets Thursday. The central bank is likely to shift to a more cautious stance as growth concerns and risks of a premature tightening in financing conditions will likely weigh more on its decision-making than rapidly rising inflation.
MS said the ECB is likely to provide limited guidance on asset purchases in the second quarter, linking the path of future purchases to the evolution of the Ukraine crisis. The end of the Asset Purchase Programme is still possible in September, followed by a 10 basis point interest rate rise in December, subject to no further deterioration of the situation in Ukraine, MS added.
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DWS said the ECB is likely to remain on the cautious side, being less pre-committed and making no serious adjustment in monetary policy communication at the March meeting.
However, asset purchase programs are no longer appropriate in an environment with 5.8% inflation already in February, with a simultaneous improvement in the labor market and the risk of higher wage settlement, said Ulrike Kastens, European economist. This should also be a message the ECB will give at the March meeting.
For 2022, inflation could average above 5% and also exceed the ECB's target in the medium term, Kastens added.
Economic Insight:
JPMorgan said the war in Ukraine is set to weigh on global economic growth and add to inflationary pressures this year.
The global economy is expected to expand 3.1%, down 0.8 percentage point compared with the estimates before the war, according to the bank. The annual inflation rate is expected at 4.6%, up 0.9 pp.
The downward revisions of JPM's growth forecasts are concentrated in Europe, with the eurozone economy expected to expand by 2.5% in 2022, down 2.1 pps compared with the pre-war forecast, while the Russian economy is forecast to contract 9.8% this year due to sanctions.
U.S. Markets:
Stock-index futures were lower, but pared deeper losses that hit after the news of the nuclear power plant fire. Dow futures plunged about 500 points immediately after the first reports emerged, with S&P 500 and Nasdaq-100 futures following a similar path, but making up lost ground in the subsequent early hours of Friday.
Investors will be waiting for the jobs report due at 1330 GMT.
Forex:
The dollar was trading near a 21-month high, with investors piling back into safe havens as Russia's military assault on Ukraine continued and as they looked ahead to February's nonfarm payrolls report.
"There is likely to be less focus on the labor market report today than there usually is, as the news from Ukraine is still dominating the developments on the financial markets," said Commerzbank currency analyst You-Na Park-Heger in a note.
The jobs data is unlikely to influence the Federal Reserve's next policy decision significantly with an interest rate rise likely regardless of a strong or weak report, she added.
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The euro, at a 21-month low versus the dollar, also hit a five-year low versus the pound and a seven-year low versus the Swiss franc as worries over the economic fallout from the Ukraine war intensify.
"The increasing weakness of the common currency continues to reflect concerns about developments in the Russia/Ukraine conflict, their impact on eurozone economic growth and inflation and possible implications also for European Central Bank strategy ahead of the Governing Council meeting next week," said UniCredit's research team.
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The pound is showing better resilience to the Ukraine war compared to other European currencies as the Bank of England is still expected to raise interest rates further this year, said ING.
"The market continues to price in five 25 basis points rate hikes by the Bank of England in 2022, which has prevented the kind of re-pricing seen in EUR markets. A decisive break below 1.1000 in EUR/USD could favor another drop in EUR/GBP, which could explore the 0.8200-0.8250 area in the coming days."
Bonds:
Societe Generale's rates strategists have turned positive on French government bonds, as Emmanuel Macron gains support via the Ukraine crisis.
"The Ukraine crisis boosts support for Macron and France should be less impacted than others by steeped up energy transitions," SocGen said. While the time could be difficult for Macron to campaign, the crisis gives him an opportunity to be seen tackling international conflicts, while making voters prioritize political stability, the strategists said.
Given this view, the geopolitical situation improves Macron's odds of re-election, SocGen said. France holds presidential elections in April.
Read Barrons.com: The Worst Is Yet to Come for Russia's Economy; 50-50 Odds on a Bond Default
Other News:
Corporate bond purchases by the ECB remained "rather sizable" in recent weeks as Russia launched a military assault on Ukraine, said UniCredit.
The central bank bought EUR1.8 billion in corporate bonds in the week ended on Feb. 25, more than the rolling four-week average and adding up to over EUR6 billion in Corporate Sector Purchase Program purchases for February, analysts at UniCredit said.
"ECB support has helped the index of CSPP-eligible bonds to outperform in a difficult market environment, taking the credit spread differential between portfolios of Non-Financials Senior bonds not included and included in the CSPP to over 20bp, 10bp higher than two weeks ago."
Commodities:
Crude oil prices were higher in Europe, ending a wild week on a quiet note, as the market balances lost Russian supply with expectations of extra barrels from Iran.
Brent crude was on course for an 18% gain for the week, its biggest since April 2020. Around 1.5 million barrels a day of oil and 1 million barrels a day of oil products from Russia have been lost after Russia's invasion of Ukraine caused many crude buyers to avoid dealing with the country, said UBS.
That has sent prices rising, but the rally has been capped by expectations an Iran nuclear deal is close, which could ease tight energy markets with additional Iranian supply.
Other News:
European Commission Vice President Frans Timmermans view that member states might need to extend the lifetime of coal power stations shows a change in the European Union's mindset toward coal, said RBC Capital Markets.
It said it would expect an increase of coal utilization and a reduction in gas-fired generation as a result, in addition to companies trying to secure coal supplies for next winter and checking if the recently announced closures might be reversed.
RBC also expects a clarification in energy policy guidelines, which some weeks ago were focused on affordability, related to security of supply and moving away from Russian dependence.
DOW JONES NEWSPLUS
EMEA HEADLINES
Russia's Shelling of Ukrainian Nuclear Power Plant Sparks Alarm
KYIV, Ukraine-Russian shelling in southern Ukraine caused a fire at Europe's largest nuclear power plant before Russian troops moved into the facility, highlighting the increasingly indiscriminate nature of Moscow's war while raising fears that it could lead to a global environmental disaster.
The fire, extinguished Friday morning, erupted at the Zaporizhzhia power plant's training facility which is adjacent to its six nuclear reactors in the town of Enerhodar, Ukraine's emergency service said. None of the six reactors, one of which is currently operational, were affected by the fire and there was no radiation leak at present.
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03-04-22 0528ET
