The Texas whipsaw massacre

Markets remain turbulent

Volatility continues to be the winner overnight, particularly in the commodity space as the street engaged in its latest grasping at straws attempt to price in “peak-Ukraine.” European equity markets got the ball rolling, hoovering up equities on Ukraine-Russia reproachment hopes ahead of a meeting between the two sides in Turkey today. Ukraine’s President also said yesterday morning that he was open to neutrality and not joining NATO. My issue is that that information was already out there, and markets ignored Mr Zelensky’s comments that he would not cede and territory to Russia as part of any negotiations. President Putin on the other hand, mentioned slurping up Crimea and part of Eastern Ukraine into Russia permanently. I guess we have our negotiating starting points. I have trouble believing anything that President Putin says, but the market is desperate to price in peak-Ukraine, and I will respect the momentum.

New York was never going to pass up the chance to price in peak-Ukraine either as 14 years of Federal Reserve quantitative easing in one shape or another has embedded buy-the-dip into the DNA of investors. It was given further impetus by comments by the UAE Energy Minister that his country favoured higher production from OEPC+. Iraq also chipped in and said it was ready to pump more if necessary. Oil plummeted and Brent crude yesterday traded in a near 19.0% range yesterday by my calculations. Breath-taking volatility and whipsaw conditions I have rarely seen. Similar scenes played out in the rest of the commodity space and precious metals.

I have an issue with just about all the premises for the whipsaw, peak-Ukraine rally. Today’s meeting in Turkey, and the Ukrainian and Russian Presidential comments were already out there. No result from today’s meeting could send markets back to square one. Additionally, the UAE Energy Minister has since qualified his comments by saying it is committed to the OPEC+ production pack and the grouping itself. He can ask for more oil to be pumped; he may not get his wish. One breath-taking statistic I saw from a newsletter I subscribe to, The Daily Shot, was that Russia was paid EUR 660 million for ONE DAY’s natural gas by the EU on March 3^rd, thanks to the surge in prices. I fully understand that the EU has no choice, but don’t be too sure that the + in OPEC+ will sign up for higher production. Additionally, Reuters is reporting that China is urging state refiners to halt fuel exports in April to maintain domestic stocks. They clearly don’t think the energy crisis is going away. Did I also mention a stalled Iran nuclear deal?

So, although the argument for lower oil is full of holes, perhaps one headline today is giving me the most caution. The US has said that Russia may be engaging in another false-flag operation as an excuse to deploy chemical or biological weapons in Ukraine. Whether you are a US fan or not, they almost alone have called the evolution of the Ukraine war almost exactly correct, even as the idea was dismissed elsewhere. I’m not sure where that leaves the world if the Kremlin takes this route, least of all for the hapless citizens of Ukraine. But it won’t be good for equities, and energy and commodity prices won’t be coming down. Tread carefully trying to pick the bottom in risk right now, its foundations are tenuous, to say the least, and as I have repeatedly said before, we are one headline away from the whole mess unravelling again.

Elsewhere, South Korea elected a new president yesterday by the narrowest of margins. Yoon Suk-yeol is right-of-centre and has ridden a wave of dissatisfaction over the cost of living and house prices to claim victory. That is probably a warning sign to other incumbents around the world facing elections this year. On the periphery, President Yoon should be more pro-business than his predecessor and that should be a modest positive for South Korean equities. However, the opposition still holds the house as the elections are not synchronous, so any aggressive legislative agenda may run into immediate headwinds. Nor will the Bank of Korea be swayed from a tightening path. Net-net, the election isn’t likely to radically shake the status quo as the narrowness of the victory isn’t screaming an overwhelming electoral mandate for change.

New Zealand’s Electronic Retail Spending data was very soft indeed for February, rising just 1.10% (10.40% exp). The omicron wave gripping the country is an easy explanation. But it will be interesting to see if the post-omicron landscape causes a change. The ham-fisted policies of the RBNZ have left the country with Norwegian prices and Nigerian wages, and it remains at the top of my list for a hard landing in 2022. The impact on the currency will be limited, however, as the kiwi is buffeted by Ukraine risk-flows and rate hike expectations.

Tonight’s main event will be the European Central Bank policy decision. Quite rightly, I expect them to call a halt to any thoughts of more QE tapering, and to severely pull back on rate hike expectations. Europe is more impacted by the Ukraine situation than most, and a wait-and-see stance is entirely justified. That may give some headwinds to the euro, but realistically, the single currency remains at the mercy of the ebbs and flows of the war in Ukraine.

Tonight’s US Inflation report has definite upside risks. The NFIB survey suggests that maybe America’s labour crunch is starting to ease, while inflation fears are rising amongst businesses. But there is a definite risk that YoY inflation rises above 8.0%, which will lock-and-load the FOMC to hike next week and possibly strengthen hawkish rhetoric, Ukraine or not. Given that monetary policy divergence across the world is a real possibility now in 2022, it is hard to construct a reason to be bearish US dollars right now.

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