Developments in Eastern Europe roil markets

• Russia announced last night that it would recognize two separatist republics in eastern Ukraine, the first country to do so, and that it would send “peacekeeping forces” to those regions. The move escalates tensions between Russia and the West and makes a diplomatic solution to the crisis even more challenging.  The UK may impose some sanctions on Russia later today, with the EU also discussing options. The US has banned new trade, investment, and financing of the breakaway regions. An emergency session of the UN Security Council is underway, chaired by Russia.
• Flash PMI data for both the UK and the Eurozone showed a stronger than expected rebound in the services sectors in February as restrictions on activity were eased.  The UK composite PMI rose to 60.2 from 54.2 while the Eurozone composite PMI rose to 55.8 from 52.3 in January.
• The UK has lifted all pandemic rules in England, including those around self-isolation after infection with Covid-19. Access to free tests will end on 1 April. The prime minister sought to draw a line under the pandemic, as his Conservative Party was unlikely to support the extension of current Covid rules which were due to expire at the end of March.
• In the UAE, the minister of state for foreign trade Thani Al Zeyoudi confirmed that the introduction of an income tax is not being discussed at the moment. His remarks were made in an interview with Bloomberg TV on Monday. 

Today’s Economic Data and Events

13:00 GE IFO business climate index (Feb) forecast 96.5

18:45 US flash manufacturing PMI (Feb) forecast 56.0

18:45 US flash services PMI (Feb) forecast 53.0

19:00 US Consumer Board consumer confidence (Feb) forecast 110.0

Fixed Income

• Markets have opened with a substantial risk-off move on news that Russian forces have moved into disputed regions of Ukraine. After being closed for a public holiday at the start of the week, US Treasuries have popped higher as investors pull out of risk assets. Yields on 2yr USTs have moved around 2bps lower this morning at around 1.448% while the 10yr yield is down around 6bps at around 1.86%. European markets had been selling off overnight on the expectation that a diplomatic resolution was possible but that move may be quickly reversed on the open later today.
• Emerging market bonds generally were weaker overnight with Russian bonds taking a hammering in the expectation that sanctions could be imposed on the country. South African bonds also weakened with 10yr yields up 4bps to 9.52% while Indian yields trickled higher to just shy of 6.7%. The move higher in oil prices could provide more unwinding for emerging markets.
• Israel’s central bank left its policy rate unchanged at 0.1% but signalled rates would rise “gradually” in the next several months.

FX

• Overnight moves in currency markets will likely be nullified by the escalation of the geopolitical crisis in Eastern Europe. In early trading today the dollar is receiving a modest risk-off bid although price action hasn’t been particularly severe until a clear diplomatic pathway, either constructive or not, emerges. EURUSD is nudging lower at just over the 1.13 handle. The European economy would be acutely exposed to the crisis from both a social and economic perspective given the continent’s important energy links to Russia. USDJPY is holding roughly neutral at around 114.75 while USDCHF is also holding relatively still.
• More risk oriented currencies are seeing wider moves, however, with GBPUSD down by 0.14% to 1.3582. Commodity currencies have generally started the day stronger with CAD, AUD and NZD all gaining.

Equities

• The major Asian equity markets are universally in the red so far this morning on the back of the news from Eastern Europe. So far today the Shanghai Composite has lost -1.2%, the Nikkei -2.2% and the Hang Seng -2.8%.
• US markets were closed yesterday, but futures markets suggest that the equity sell-off will be widespread later today. European equity markets were already under risk-off pressure yesterday as the FTSE 100 dropped -0.4%, the CAC -2.0% and the DAX -2.1%.
• Locally, the Tadawul added 0.8% but the DFM (-0.5%) and the ADX (-1.2%) both closed lower.

Commodities

• Oil prices have pushed higher on the news that Russia has recognized breakaway regions of Ukraine and moved Russian troops into them. Brent futures have added almost 2% in early trade already, up at USD 97.22/b while WTI has gained 3.7% to USD 94.44/b. As the outcome of a UN Security Council becomes clear and any diplomatic pressure on Russia emerges oil prices could move substantially higher.
• Gold prices have also moved higher, adding 0.2% in early trading today to push up above USD 1,909/troy oz. We would expect more of a move into the havens in the scenario that the crisis in Eastern Europe worsens.

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