Russian sanctions stepped up as Ukraine conflict escalates

• Sanctions against Russia have been stepped up over the weekend as the war in Ukraine has escalated. The US, EU, UK and Canada have banned a number of Russian lenders from the international payments system SWIFT and are also placing restrictions on the country’s central bank according to a joint statement, as the West looks to prevent Russia undermining sanctions with its sizeable international reserves. President Putin and foreign secretary Sergei Lavrov have also been directly sanctioned, along with other wealthy Russians with ties to the government.
• The University of Michigan consumer sentiment index was revised up modestly in its final reading for February, released on Friday. The actual figure was 62.8, compared to the initial reading of 61.7. Nevertheless, this still leaves the index near decade lows, as concerns around inflation and its effect on spending power weighs on consumers’ minds. Given that the survey was largely conducted prior to the latest surge in petrol prices in the wake of Russia’s invasion, the index could remain under pressure in the next reading.
• Despite the gloomier sentiment, consumers are spending more in the US as personal spending ticked up 2.1% m/m in January, exceeding expectations of 1.6%. This compared to the (downwards revision) of -0.8% in December. Having saved money through the pandemic, households are spending despite the accelerating inflation levels, but this could come under pressure as prices continue to rise.
• In a positive signal for the US economy in 2022, durable goods orders grew 1.6% in January, beating predictions of 1.0%. December’s print was revised up to 1.2%. The survey suggested that some of the supply chain disruptions and bottlenecks that have hindered the US recovery to date are starting to ease.
• The Dubai Land Department has launched a new Residential Rental Performance Index in collaboration with Property Finder. According to a statement from the DLD, there were 51,452 residential leases in January, split roughly equally between new leases and renewals. The 564,036 leases recorded in 2021 as a whole was the largest figure in 12 years and was 56% greater than the 2020 reading.
• Non-oil trade in the UAE was up 27% y/y to AED 1.9tn in 2021, and 11% when compared to pre-pandemic 2019. Thani bin Ahmed Al Zeyoudi, minister for foreign trade, said that the goal was to double this in the next few years. To this end, there have been recent deals struck with trading partners such as India and Philippines.

Today’s Economic Data and Events

No major data releases today

Fixed Income

• Despite the enormous geopolitical risks stemming from Russia’s invasion of Ukraine last week, the net impact on benchmark fixed income markets has been relatively contained as investors focus on the severity of sanctions imposed on Russia and maintain expectations that central banks will still proceed with tightening monetary policy later this year. A broad index of US Treasuries fell around 0.3% last week, hiding some wide intraday moves in favour of USTs, as markets quickly discounted the geopolitical risks. Likewise, an index of European bonds from economies more likely to be acutely caught up in any economic fallout from the war fell by around 0.66% last week. With markets likely to remain capitated by headlines more wide intraday swings are likely to be expected in the coming days and weeks.
• At the close of trading the 2yr UST yields had gained more than 10bps last week to settle at 1.5697% as investors still see a clear path to the Federal Reserve hiking in a few weeks. The 10yr yield showed a relatively more muted upswing, adding 3bps over the week to 1.9617%. In European markets, the 2yr schatz fell comparatively more, with yields adding almost 10bps to -0.387% while the 10yr bund yield rose around 4bps to 0.229%. In the UK market, the 2yr gilt yield actually fell, down by around 6bps to 1.1980% while the 10yr gilt yield added 8bps to 1.456%.
• Emerging market bonds were caught up in a broad risk-off move that showed little respite relatively to developed market bonds. India’s 10yr yield added 9bps last week to settle at 6.758% while South African yields added 18bps to 9.674%. Russian bonds as expected collapsed with yields adding more than 600bps last week to 15.985%.
• Central banks setting policy this week include the RBA (no change expected), Bank of Canada (a 25bps hike to 0.5% on the overnight lending rate), Bank Negara Malaysia, and the Central Bank of Sri Lanka.

FX

• Currency markets swung sharply between risk-on and risk-off sentiment in the wake of Russia’s invasion of Ukraine, sometimes with wide moves in single days. For the week as a whole it was still dollar positive with a broad measure of the greenback up 0.6% despite some selling at the end of the week. Expectations that the conflict will prove inflationary and not derail the Fed from hiking rates should help to keep some support for the dollar. EURUSD showed some heavy single day selling, down as much as 1% on Thursday but pared some of the losses to contain its weekly decline to around 0.5% to settle at 1.1268. USDJPY showed some haven moves but in the end closed the week higher at 115.55 as FX markets have quickly discounted the conflict and are pricing in the longer-term effects.
• Sterling was notable among the weak performers last week, dropping by more than 1.3% to GBPUSD 1.3409. Commodity currencies generally managed to bounce back strongly with USDCAD falling last week by 0.3% to 1.2713 while AUD and NZD both added around 0.7% each to 0.7226 and 0.6743 respectively.

Equities

• Equity markets were equally volatile over last week, oscillating in line with news around sanctions against Russia. The net over the week was in the end negative for almost all major global indices, but this was mitigated by some sizeable gains seen on Friday.
• The strong gains on Friday led US equity markets to be global outperformers last week, although only the S&P 500 closed up with a 0.1% w/w gain. The NASDAQ lost -0.2% and the Dow Jones -0.7%.
• Closer to the unrest in Eastern Europe, European equity markets had a far worse week. The FTSE 100 was a relative outperformer with a -0.3% drop, while the CAC lost -2.6% and the DAX -3.2%.

Commodities

• After having moved up above USD 100/b for the first time since 2014 on news of the Russian invasion of Ukraine, oil prices faded some of their gains. Futures still managed to be up on the week but given that the conflict involves one of the world’s most important energy exporters the price action was arguably contained. Brent futures added 4.7% on the week as a whole to close at USD 97.93/b while WTI was marginally positive, closing at USD 91.59/b. So far sanctions from the US, EU, UK and others have refrained from targeting Russian exports of oil and gas for fear of the inflationary impact it would have on domestic economies.
• This week eyes will turn to the response of OPEC+ to the conflict. We expect they will maintain plans to add another 400k b/d when they meet on March 2 nd. Russia does still remain part of the producers’ alliance and most of the crude actually departs via ports far from the conflict.
• A more immediate risk to oil markets stems from the shutting of major oil fields in Iraq with around 500k b/d of capacity as a result of protests and required maintenance.

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