From Bad to Worse

This morning, headlines in Asia have been dominated by reports that fighting had caused a fire at Ukraine’s nuclear power plant and Europe’s largest, Zaporizhzhia, in the southeastern part of the country. That sparked a risk-off move in asset classes, with equities falling and oil rallying.

War reporting is a fluid situation at best and initial reports stated that one of the reactors, thankfully closed for maintenance but still containing nuclear material, was on fire. Further reports rolling in now seem to be saying the fire was outside of the reactor perimeter and that local firefighters had been allowed in to control the blaze without being shot at. That has caused a temporary pullback in the risk-aversion flows sweeping Asian markets.

It does now though, highlight another serious risk factor surrounding the Russian invasion of Ukraine, the safety of its nuclear plants now that Russia’s tactics appear to be shifting to its usual playbook, levelling cities into submission with artillery and rockets. Europe appears to be at the mercy of the ability of Russian artillery regiments to fire accurately. I’m not comforted by that.

Prevailing winds in the area run from east to west across some of Ukraine’s most important agricultural production areas, and into Western Europe. It doesn’t take a genius to extrapolate the potential risks associated with that scenario and I am struggling to see any reason why European markets won’t open deeply in the red once again this afternoon. Or indeed, whether this potential calamity would be the trigger for deeper involvement in the conflict by other national interests. With that in mind, any relief rallies, are probably opportunities to sell into.

Oil’s volatility was bordering on mind-boggling overnight, with Brent crude a hairs-breath away from USD 120.00 a barrel, before plummeting to the USD 110.00 area as stories emerge that an Iranian nuclear deal was imminent, potentially in the next 72 hours. I have seen various bits of research on its impact, with the consensus being that Iran will add another 1.5 million barrels a day to global markets, as it is already selling quite a bit anyway via the seas of Malaysia and transponder-less tankers. That won’t go near to replacing sanctioned Russian production, and while it will be greeted with relief by markets, it won’t change the underlying dynamics. Elsewhere, agricultural, and base metal prices remained on fire as potential shortages send international buyers into a panic.

Ukrainian and Russian officials discussed humanitarian corridors and supplies yesterday at their meeting in Belarus, but nothing else concrete has emerged. Both sides have agreed to a third meeting, but I suspect any relief rallies will have a declining marginal utility from now on, as it seems that the Kremlin seems intent on prosecuting its invasion to its conclusion. Volatility will remain sky-high, and clutching-at-straws rallies will occur, but the stagflationary wave is on its way and the underlying trend is your friend.

With Ukraine dominating markets in Asia, there’s no point in talking about anything else really, except for China’s Two Sessions, which starts today, and the US Non-Farm Payrolls this evening. Market talk is that China will set the lowest economic growth target in decades, between 5.0% and 5.50%. China’s equity markets have been soft anyway as it grapples with shared prosperity and the property sector, and market reaction will be muted.

US Non-Farm Payrolls tonight is expected to print at around 475,000 jobs added. I believe there are upside risks to that number which will lock and load a 25 bps hike by the FOMC this month. Only a huge downside surprise might give the Fed food for thought, or radioactive particles drifting across Europe. Otherwise, we remain on track for the start of many hikes from the Fed going forward as the Ukraine war throws more inflation onto an inflationary fire that was already burning brightly.

Nobody will want to be short risk going into this weekend, and as a result, I believe any rallies in equities, dips in the US dollar and treasuries, and dips in gold, will be short-lived.

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