Russian central bank hikes rates as sanctions bite

• The Russian central bank hiked its benchmark interest rate by 10.5pp to 20% yesterday, a near-two decade high. This was amongst other measures aimed at shoring up finances in the face of increasingly severe Western sanctions – the ruble had lost 28% against the US dollar at the open before clawing back losses later in the day, and central bank governor Elvira Nabiullina acknowledged that the sanctions ‘limited the central bank’s options to use its gold and foreign exchange reserves’. The bank has also introduced a ban on foreign selling of Russian securities and made it mandatory for exporters to secure hard currency for sales. Stock markets were closed for the day.
• China PMI surveys beat expectations in February in data released early this morning. Consensus had predicted that both the official and the Caixin manufacturing surveys would fall just short of the neutral 50, but in the end both recorded positive expansionary readings of 50.2 and 50.4 respectively. The official services PMI also beat expectations, coming in at 51.6 as the front-loaded support from the central bank has helped maintain growth.
• Petrol prices in the UAE have increased another 11% m/m (55% y/y) in March, reflecting the increase in global oil prices since the start of this year. The price of 95-octane petrol is now over AED 3 per litre for the first time since August 2015 when the UAE moved from fixed to floating petrol prices. Prices have increased 17% in Q1 2022 and will contribute to faster consumer inflation in the UAE in H1 2022.   
• Saudi Arabia’s broad money supply declined -0.6% m/m in January but annual growth accelerated to 7.9% y/y.  M1 growth slowed but was offset by increased FX deposits last month. Private sector credit rose 1.0% m/m and 14.8% y/y in January, the slowest annual growth since April 2021. Net foreign assets at the central bank fell USD 8.5bn to USD 429.7bn in January. Point of sale (PoS) transactions declined m/m but were up almost 17% y/y in January.  Total consumer spending (PoS transactions plus ATM withdrawals) rose 0.1% m/m and 4.5% y/y last month.    
• Turkey’s GDP expanded 9.1% y/y in Q4 2021, broadly in line with consensus projections of 9.0% and faster than the 7.5% growth recorded in the previous quarter. This brings full-year growth to 11% as it recovered from the pandemic. In the final quarter of the year the economy benefited from looser monetary policy and recovering export markets, but the sharp acceleration in inflation that has characterized recent months could start to weigh more heavily on the outlook this year if consumption is crimped. Household consumption rose more than 21% in Q4, while exports also rose by a similar percentage. However, fixed investment declined, as did government spending. The trade balance will likely have deteriorated in the first months of 2022 as the value of energy imports increased sharply. Bloomberg consensus projects real GDP growth of 3.5% in 2022.
• The Reserve Bank of Australia kept its benchmark interest rate on hold at 0.1% this morning, as had been anticipated. The statement acknowledged that wage growth was picking up but noted that it still remained below the low pre-pandemic rates, and that inflation remained lower than in other countries despite now picking up more strongly.

Today’s Economic Data and Events

12:00 France Markit manufacturing PMI, February final. Forecast: 57.6

13:00 Markit Eurozone manufacturing PMI, February final. Forecast: 58.4

17:30 Canada quarterly GDP annualised, Q4. Forecast: 6.5%

19:00 US ISM manufacturing, February. Forecast: 58.0

Fixed Income

• Benchmark government bond markets opened the week with a strong risk-off tone as investors assesses the impact of stronger US, EU and other nations’ sanctions on Russia, particularly excluding large parts of the country’s financial system from the SWIFT payment messaging mechanism. Combined with month-end flows, the elevated geopolitical tensions helped to push USTs up considerably. The yield on 2yr USTs moved to as low as 1.41% at one point late in the session before fading the move and settling at 1.4323%, down almost 14bps on the day. The 10yr fell from around 2% at the end of last week to nearly 1.8% yesterday before closing at 1.8250%, down almost 14bps.
• Price action in European bonds was more contained but showed a similar trend with bunds and gilts all ending the day higher. Yields on 2yr German bonds fell more than 15bps to -0.548% while gilt yields for the same tenure were off by 16bps to 1.021%. On the 10yr bund, yields fell 10bps to 0.13% while and the similar gilt was off by 8bps to 1.406%.
• Emerging market bonds showed a mixed performance with South African bonds falling heavily; yields added 16bps overnight to 9.816% while Indian yields added around 2bps on the 10yr to 6.770%. Yields on Turkey’s 10yr USD Eurobond rose by 3bps to 8.194%.
• Money markets are showing signs of distress with the FRA/OIS spread widening as markets hunt for dollars and haven assets and cross-currency swaps, particularly for euros, widen considerably. The Federal Reserve could restart some of the emergency swap lines it used during the early days of the pandemic to stabilize financial markets in a disorderly breakdown, which is not our central scenario.
• Atlanta Federal Reserve president Raphael Bostic said he still expects a 25bps hike at the upcoming March FOMC but that should monthly inflation numbers show signs of accelerating he was “really going to have a look” at a 50bps hike. Markets at this stage have essentially priced out a 50bps hike for the March meeting although we will still get the February non-farm payrolls and inflation prints ahead of the FOMC.

FX

• Currency markets opened on an immensely risk-off footing to start the week with EURUSD plunging down as much as 1.3% at its trough. As markets absorbed the impact of the new sanctions that have been placed on Russia those losses were faded over much of the day although markets still ended up very much in favour of the dollar.
• EURUSD closed down 0.43% at 1.1219 and is still trading lower this morning. Spillover risks from the conflict, whether in financial systems or material involvement, is weighing on European assets generally with EURUSD basis swaps widening in favour of the dollar considerably. USDJPY managed to move as a haven should overnight, down 0.5%, with all the moves coming later in the session to settle at 115 handle.
• GBPUSD managed to end the day near neutral after an early dip at the start of trading. The outlook for the Bank of England remains for a hike at the March MPC meeting although changes of a greater than 25bps hike have receded since the invasion of Ukraine began.
• Commodity-currency markets generally were stronger against the dollar. USDCAD fell 0.3% to 1.2675, bolstered by a surge in oil prices over much of the trading day. Both AUD and NZD recovered from sharp early sell-offs to settle at 0.7263, up 0.5% for the AUD, and at 0.6772, up 0.4% for the NZD on the day.

Equities

• Asian equity markets were mixed to start the day, with little of the selling pressures seen through the rest of the world later in the session. Bolstered by some robust earnings results, China’s Shanghai Composite closed up 0.3%, while Japan’s Nikkei ended the day 0.2% higher. While the Hang Seng dropped -0.3%, Indian equity markets performed strongly, with the Sensex adding 0.7% and the Nifty 0.8%.
• Key European markets were under pressure from the open, with travel firms feeling the pinch, alongside any Russian companies with dual listings or firms with exposure to Russia. On the other hand, Germany’s announcement that it would boost its defence spending saw a surge in aerospace and defence stocks across the continent. At the close, the risk-off sentiment had abated somewhat but the key indices still ended in the red. The FTSE 100, the DAX and the CAC lost -0.4%, -0.7% and -1.4% respectively.
• In the US, the NASDAQ closed up 0.4% while the S&P 500 (-0.2%) and the Dow Jones (-0.5%) both lost ground.

Commodities

• Oil prices lurched higher as markets priced in the context of Russia’s exclusion from the SWIFT financial messaging system, even though direct energy related sanctions remain off the table for now. Brent futures added 3% overnight to settle at USD 100.99/b while WTI gained 4.5% to SUD 95.72/b.
• The US and several allies are considering a coordinated release from strategic petroleum reserves of around 60m bbl total. The IEA will hold an emergency meeting today on whether to advise its OECD membership on the need to release reserves.
• Gold prices added more than 1% as investors flocked to haven assets. The metal ended the day at USD 1,909/troy oz while palladium saw even larger gains as Russia, the main producer of the metal, will face restrictions on trade.

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