Markets Unsure How to React after Putin Sends Troops into Breakaway Regions of Eastern Ukraine

February 22, 2022

Investors don’t know if Putin’s move is the opening round of a full-scale invasion. Putin’s provocation has elicited push-back from Western allies, who aren’t waiting for the Russian leader to expose all his cards. Germany has halted work on the Nord Stream 2 oil pipeline. U.S. President Biden is tightening economic sanctions against Russia.

Equities initially slumped in knee-jerk fashion to the escalation of Russian saber-rattling. Share prices in the Pacific Rim tumbled 2.7% in Hong Kong, 1.7% in Japan, 1.4% in Taiwan and South Korea, and 1.0% in China, Singapore, and Australia, but initial losses in European markets and U.S. stock futures have been scaled back.

The dollar is currently just 0.1% softer on the day in weighted terms, with a dip of 0.2% against the euro and 0.1% versus the loonie but rises of 0.3% relative to the Swiss franc and sterling and 0.2% vis-a-vis the yen. Net gains of 1.3%, 0.9% and 0.8% have been made against the Turkish lira, Ukraine hryvnia, and Russian ruble.

A full-blown war in Ukraine would likely intensify the current price elevation of energy, food and other commodities. Brent oil touched a 52-week high of $99.5 per barrel earlier today, and West Texas Intermediate crude is 3.8% higher on net so far this Tuesday. The dollar has lost 1.1% against the Swedish krona and 1.8%. The dollar value of a Bitcoin has climbed 1.7%, but the initial rise in gold today has been reversed.

War in Europe would additionally incentivize central banks to tighten monetary policies and to trim their bloated balance sheets. The ten-year U.S. Treasury yield is a basis point firmer at 1.93%. Comparable British and German sovereign debt yields are three basis points firmer.

Germany’s business climate index, which is prepared by the IFO Institute, improved more markedly than expected in February, climbing 2.9 index points to a five-month high of 98.9 (compared to 94.8 at end-2021). Sub-indices for manufacturing and services each rose to six-month highs, while those for trade and construction improved to 5- and 3-month highs. Covid restraints were relaxed further in the month, and Omicron infections subsided, but note that this widely followed forward-looking measure of the German economy does not yet reflect the possibility of the largest European war since 1945 breaking out.

Among other released data today, the orders component of the British industrial trends survey fell unexpectedly in February and by four points to a four-month low of 20. Also the monthly U.K. public sector net borrowing figure for January showed a surplus of GBP 2.9 billion versus a deficit of GBP 2.5 billion a year earlier, and the deficit over the first ten months of the current fiscal year shrank to GBP 138.5 billion from GBP 271 billion a year earlier.

Turkish business confidence improved in February to a five-month high but remained five index points weaker than last July’s nine-year peak.

South Korean consumer confidence sagged to a 6-month low in February and was about seven index points below last June’s 3-1/2 year peak.

Irish wholesale price inflation fell back a full percentage point to a 2-month low in January of 3.5%.

Hong Kong CPI inflation was halved to a six-month low of 1.2% in January from a 5-month high in December of 2.4%.

Italian CPI inflation in January was confirmed at the same as the preliminary estimate of 4.8%, which was a 309-month high and up from 0.8% in January 2021.

Hungary’s central bank policy interest rate has been raised by another half percentage point to 3.4%, matching the increase done in January. From a base of 0.60% through May 2021, the rate was raised in each of the final seven months of last year by a combined 180 basis points. CPI inflation accelerated from 2.2% in mid-2020 to 2.7% by January 2021 and 7.9% last month, and that most recent estimate was a full half-percentage point greater than forecast.

Today’s U.S. economic data menu includes the FHFA and Case Shiller house price indices, the Conference Board estimate of consumer confidence, and the Richmond Fed monthly manufacturing survey.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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