MARKET WRAPS

Watch For:

U.S. Consumer Price Index for February; U.S. Weekly Jobless Claims; Oracle Corp. 3Q Results.

Opening Call:

Stock futures fell and oil prices rose as investors monitored developments surrounding Russia's invasion of Ukraine and awaited fresh inflation figures.

While there have been some signs from Ukrainian officials that compromises to end the war are on the table, a diplomatic solution remains just a hope as the foreign ministers from Ukraine and Russia meet in Turkey Thursday. It will be the first cabinet-level meeting since the full-scale Russian invasion two weeks ago.

"I have an issue with just about all the premises for the whipsaw, peak-Ukraine, rally," said Jeffrey Halley, an analyst at broker Oanda. "No result from today's meeting could send markets back to square one."

The latest rally "still seems like a huge leap of faith on the part of markets, particularly where Russia is concerned where there is scant evidence that they can be trusted on anything," added Michael Hewson, an analyst at broker CMC Markets.

"Yesterday there was this rally and already you can see profit-taking. There's very little conviction in this market," said Agnès Belaisch, chief European strategist at the Barings Investment Institute.

The European Central Bank will release a statement on its monetary policy and interest rates at 7:45 a.m. ET Thursday. It is expected to downgrade its forecast for economic growth and raise its outlook for inflation, which has been fueled by surging energy prices and a decline in the euro against the dollar.

High oil prices have prompted concerns that the U.S. and Europe could see sustained inflation and lower economic growth, as elevated energy prices eat away at household spending on other goods and services.

U.S. consumer-price index data for February will be published at 8:30 a.m. Thursday, and economists forecast that inflation climbed further in that month, having reached a four-decade high in January.

Market Insight:

Another bumper U.S. CPI data release should still cause investors to reassess a 50-basis-point interest-rate rise by the Fed in March as more likely even though market pricing still centres around a rise of 25 basis points for next week's meeting, said Mizuho's rates strategists.

The headline annual CPI is expected to have risen to 7.8% in February from 7.5% in January, according to The Wall Street Journal's poll of analysts. They expect the annual core inflation to have risen to 6.4% in February from 6% in January, according to the poll.

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The rest of the world's direct financial exposure to Russia has fallen in recent years and, in aggregate, is now small, said Capital Economics. This limits the risk of financial contagion from the collapse in Russia's economy that is underway.

"If financial contagion does spread to major economies, it is likely to be because losses are concentrated in a systematically important institution."

The vulnerabilities are impossible to fully assess in advance of problems emerging, but these are likely to be greatest in Europe, Capital Economics noted.

Forex:

The dollar's steep drop from Monday's 21-month high against a basket of currencies followed hope that the conflict in Ukraine could stabilize, but those hopes could soon dissipate and the sharp, volatile moves reflect extreme uncertainty, said UniCredit.

Currency markets are "characterized by very large swings," even on an intraday basis, with investors forced to "operate on day-to-day logic, just tracking news as it appears on the screens." This is exacerbating volatility in major currencies, UniCredit said.

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Thursday's ECB meeting and talks between Russian and Ukrainian ministers in Turkey pose risks for the euro and eastern European currencies, which will likely lose their recent shine, said UniCredit.

It expects the Russia-Ukraine conflict will make the ECB cautious and say policymakers are unlikely to confirm market expectations for a rate increase late this year.

Combined with any lack of "concrete breakthrough" following the talks in Turkey, this would dampen Wednesday's "enthusiasm" for buying the euro.

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Bitcoin's dollar value dropped more than 6% Thursday from its 5 p.m. ET level Wednesday to $39,246.94. The world's largest cryptocurrency by market value rallied Wednesday as President Biden announced an executive order to study digital currencies, a move the industry welcomed and skeptics decried as delaying necessary regulation.

Bonds:

In bond markets, the yield on the benchmark 10-year Treasury note ticked down to 1.924% Thursday, from 1.946% Wednesday

Eurozone government bond yields were little changed as investors await the ECB's policy meeting, with focus on new staff forecasts and a policy response to high inflation and growth risks, analysts said.

"Rays of hope in the war [in Ukraine] and broad-based risk-on have increased chances that the ECB will announce policy normalisation today, " Commerzbank's rates strategists said. The EU summit could be stealing the show from the ECB though, they added.

Commodities:

Oil bounced higher in Europe, with Brent up almost 5%, after prices suffered their biggest one-day drop in nearly two years, and SPI Asset Management said "to suggest the market is confused would be an understatement as we are in an unprecedented situation."

U.S. talks with Venezuela about lifting oil sanctions have weighed on prices. Before sanctions, the U.S. imported 784,000 barrels a day from Venezuela, more than the 605,000 barrels a day it has imported from Russia in recent years, SPI said. Still, rapidly cutting out Russian oil is likely to keep prices volatile.

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Rystad Energy said Brent could hit $240/bbl this summer in a worst-case scenario if more Western countries joined the U.S. sanctions. "This is the largest energy crisis in decades and the impact on the world's most important commodity is going to be unprecedented."

Rystad said that if the 4.3 million barrels/day that Russia exports to the West are halted by April, and assuming China and India imports remain unchanged, Brent would need to rise to $240 for demand to be sufficiently reduced to balance the market.

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Gold rose in early European trading. A softening of negotiating positions in the Russia-Ukraine war has emerged. Russia said it prefers to ensure Ukraine's neutral status through talks and that Moscow isn't seeking to overthrow the Kyiv government.

However, there are still uncertainties around elevated energy prices, which could add to inflation, Oanda said.


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03-10-22 0533ET