Initial sanctions on Russia are limited

• The US president has described Russia’s actions in Ukraine as “the beginning of [an] invasion of Ukraine” and announced more US troops would be sent to shore up defences in the Baltic members of NATO. Biden also announced sanctions that would cut off Russian access to western bond markets, limiting its ability to raise or trade debt in US or European markets. Two state banks have been sanctioned as have three individuals close to President Putin. There are options for tougher sanctions on larger Russian financial institutions which can be announced if the situation deteriorates further.  A planned meeting between the US secretary of state and Russian foreign minister which was to take place on Thursday has been cancelled. Meanwhile in Europe, Germany announced it would halt certification of the Nord Stream 2 pipeline.
• The German IFO business climate index rose to 98.9 in February, above forecasts, indicating an improvement in in both the current situation assessment and expectations of German businesses.  Germany appears to be over the worst of the Omicron outbreak and the services sectors appeared to cope relatively better in the latest wave, leading to a more optimistic outlook. Businesses also expected supply chain pressures to ease.
• US data was mixed overnight, with the PMI surveys coming in stronger than expected while consumer confidence declined. Both the manufacturing and services PMIs beat expectations rising to 57.5 and 56.7 respectively in February on the preliminary releases. Output remains strong and price pressures are high, but here too the surveys point to an improvement in supply chains, with the supplier delivery times component at a nine-month high.  Consumer confidence fell by 0.6 points to 110.5 in February, with higher petrol prices and geopolitical tensions seemingly weighing on consumers' outlook. 
• The Reserve Bank of New Zealand raised its benchmark rate by 25bp to 1%, and signalled more rate hikes to come.  The Bank said it expects the rate to rise to at least 2.5% by early 2023 and to 3.25% by Q4 2023, given the medium term outlook for growth and employment and upside risks to inflation.

• Dubai Airports CEO Paul Griffiths expects passenger traffic through Dubai to almost double this year to 57mn as the easing of covid restrictions boosts international travel and tourism. Passenger traffic through Dubai Airport exceeded 86mn in 2019, and may only recover to this level by 2024 according to Griffiths.

Today’s Economic Data and Events

14:00 EC CPI (Jan) forecast 5.1% y/y prev 5.0% y/y

Fixed Income

• After moving higher early in the day on a broad risk-off move, benchmark government bonds generally faded their gains over the course of trading as the sanctions imposed by the US, UK and EU stopped short of more restrictive measures such as cutting Russia out of the SWIFT payment system or interrupting its exports of commodities. US Treasuries settled lower with 2yr UST yields up 8bps at 1.5491% while the 10yr added 1bps to close at 1.939%.
• In European markets the moves were broadly similar. The 2yr Schatz yield closed up 5bps at -0.406% while the 10yr bund yield added almost 4bps to 0.241%. In gilt markets the front end also edged higher to 1.332%, up almost 6bps, while the 10yr added more than 6bps to 1.47%.
• Emerging market bonds closed lower in general overnight with Russian yields up 30bps to 10.9%. South African yields nudged higher to 9.572%, up 2bps, while Indian yields added 6bps to 6.752%.

FX

• Currency markets faded an initial flight to safety over the course of the day as it became clear that US, UK and EU sanctions would be specific and targeted in response to Russia’s recognition of two break-away regions of Ukraine. The dollar was generally offered against all peers after an initial pop higher with the announcement of the US sanctions programme acting as a catalyst for bigger moves against the greenback.
• EURUSD added 0.12% on the day to move up to 1.1325 even as the European economy would be the most likely collateral victim of tougher sanctions on Russia should they be imposed. Both USDJPY and USDCHF moved higher as investors unwound their haven positions.
• GBPUSD fell 0.13% on the day but is already regaining some of that loss and is trading near 1.36 handle. Commodity currencies were mixed with USDCAD moving upward to 1.277 while both AUD and NZD strengthened. Another rate hike from the RBNZ this morning is also helping to push the Kiwi higher, up 0.22% at 0.6774.

Equities

• Some of the risk-off sentiment that started the day abated through the session yesterday as greater clarity over the scope and scale of Western sanctions against Russia became clearer. Having seen early losses in early trading, European equity markets staged a comeback later in the day, and in the end the DAX closed down just -0.3%, the CAC closed flat, and the FTSE 100 gained 0.1%.
• There were more pronounced losses later in the day in the US, as the S&P 500, the NASDAQ and the Dow Jones lost -1.0%, -1.2% and -1.4% respectively.
• Locally, the DFM closed down -0.1% while the ADX added 0.6% and the Tadawul 0.8%.
• Early trading is mixed so far in Asia this morning. The Shanghai Composite and the Hang Seng are both positive, recouping some of yesterday’s losses, while the Nikkei is heading lower again.

Commodities

• Brent futures came within USD 0.50/b of hitting USD 100/b overnight as a sharp initial move higher faded over the course of the day as it became clear that Russian energy exports were not facing sanctions in the first instance. Brent settled up 1.5% to USD 96.84/b while WTI added 1.4% to USD 92.35/b. Both contracts are likely to be tetchy on newsflow, however, in the very near term.
• While the crisis and response in Eastern Europe develops, there looks to be hope that another geopolitical situation is close to being resolved. European and Russian negotiators have said talks to restore the JCPOA have come to their “endgame” and talks could be concluded as early as this week.
• OPEC+ ministers have pushed back against an idea to increase output at a faster pace when they decide next week for April output levels. Energy ministers from both Iraq and Nigeria believe there is “no need” for additional oil and that the market is “still a little bit too soft.”

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