Futures Tumble After Deadly Escalation In Ukraine Crisis

Any hope of de-escalation following the news late last night that Putin and Biden had agreed to a Macron-organized summit to pursue a diplomatic path out of the Ukraine crisis lasted only a few hours, and died a painful death around 3am Eastern time, after Kremlin spokesman Dmitry Peskov poured cold water on the summit progress when he said that  “It’s premature to talk about any specific plans for organizing any kind of summits” and that there are no “concrete plans” for a summit yet. Subsequent news that a mortar shell had destroyed a Russian border checkpoint near Rostov – something which Ukraine’s military denied doing – did not lift the already downbeat mood, but it was the news just after 7:40am ET that Russia had killed five “saboteurs” who tried to violate its border (and which Ukraine once again slammed as fake news) in an unconfirmed incident that would be the first direct clash with Ukrainian forces, that sent US equity futures tumbling 0.92% to session lows of 4,299.5, down some 90 points from overnight highs, and hit global risk assets while safe havens such as gold and the dollar spiked. The 1.5% decline in Nasdaq 100 futures outpaced that of S&P 500.

While US markets are closed for the President’s Day holiday, equity futures are trading and have been following the news out of Ukraine tick for tick, as have European bourses, with the Euro Stoxx 600 index falling as much as 1.9%, to the lowest since Oct. 6 as investors digest latest developments around Ukraine tensions. 

And while US cash treasuries are also closed, Treasury futures are open and at last check were implying a yield of 1.90%

Russian stocks fell the most since March 2020 and the ruble tumbled for a third day. Gazprom PJSC and Sberbank PJSC were among the biggest drags on the MOEX Russia Index, falling more than 8% each. U.S. Treasury futures rose, suggesting renewed haven demand.

“Global data and central banks’ stance on tightening are all taking a back seat to Ukraine, with markets nervously awaiting the next headline,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada. “Thinner liquidity because of the U.S. holiday adds to the anxiety.”

Bets on a supersized Federal Reserve rate hike of 50 basis points in March have diminished amid the standoff over Ukraine.

Earlier in the session, Asian stocks fell as another rout in Chinese tech names and continued uncertainty around the Ukraine issue deterred risk-taking. The MSCI Asia Pacific Index was down 0.4% as of 6:08 p.m. in Hong Kong, heading for a second day of losses. Tencent Holdings and Alibaba Group were the biggest drags on the benchmark as investors fretted that Beijing may roll out more restrictions for private enterprise. The Hang Seng Tech Index plunged 2.8%. The standoff in Ukraine continues to be a source of volatility for traders. The Asian benchmark earlier pared a loss of as much as 0.8% after France said U.S. President Joe Biden and his Russian counterpart Vladimir Putin accepted in principle a French proposal for a diplomatic summit on the condition that Russia doesn’t invade Ukraine. While the White House confirmed that Biden accepted the meeting in principle, the Kremlin later said there are “no concrete plans” for such a summit. Still, key gauges in Japan and South Korea pared a bulk of their intraday losses before the close.

“There is scope for a relief rally should there be any easing in these tensions given very cautious positioning,” Nomura analysts including Chetan Seth wrote in a note. “Any further escalation from here will likely lead to significant risk-off for Asian equities.”  Tensions over Ukraine have overtaken the market’s preoccupation with the Federal Reserve’s path to monetary-policy tightening in recent days, with the U.S. telling allies that a Russian invasion could target multiple cities beyond Ukraine’s capital. Moscow continues to deny it plans to invade Ukraine. Meanwhile, Asian stocks are also having to contend with earnings estimates that aren’t rising as fast as in the rest of the world

Japanese stocks pared losses amid optimism over a potential summit on Ukraine between U.S. President Joe Biden and his Russian counterpart Vladimir Putin. France said Biden and Putin accepted in principle a French proposal for a diplomatic summit. U.S. officials said a summit would occur only if Russia doesn’t invade Ukraine. There was no immediate confirmation from Moscow, which has repeatedly denied that it plans to invade. Electronics and chemical makers were the biggest drags on the Topix, which closed 0.7% lower, trimming an earlier slide of as much as 1.8%. Tokyo Electron and Shin-Ertsu Chemical were the largest contributors to a 0.8% loss in the Nikkei 225, which had fallen 2.1% in early trading. “It’s totally possible for the summit to end without making any progress, so the mood will likely be for investors to wait until they see the meeting results,” said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management in Tokyo. Energy is another areas of concern, as , “the high oil prices are leading to an increase in domestic inflation, little by little,” he said.

With markets whipsawed by Russia’s troop buildup near Ukraine and efforts at diplomacy to bring both sides back from the brink of war, late on Sunday France said its proposal for a summit was accepted in principle by Biden and Putin. U.S. officials said the  meeting would only occur if Russia doesn’t invade Ukraine, while Russia has said repeatedly it has no plans to do so. Earlier, the U.S. told allies that a Russian invasion of Ukraine could target multiple cities beyond the capital, Kyiv. Echoing a familiar refrain, Biden said Friday he’s convinced Putin has decided to move against Ukraine. U.S. Secretary of State Antony Blinken and Russian Foreign Minister Sergei Lavrov are due to meet this week.  

Similar to Japan, Australian stocks – which closed before the barrage of escalatory headlines hitting this morning – reversed losses with the S&P/ASX 200 index rising 0.2% to close at 7,233.60, erasing an earlier drop of as much as 0.9% amid optimism over a potential summit on Ukraine between U.S. President Joe Biden and his Russian counterpart Vladimir Putin. France said Biden and Putin accepted in principle a French proposal for a diplomatic summit. U.S. officials said a summit would occur only if Russia doesn’t invade Ukraine. There was no immediate confirmation from Moscow, which has repeatedly denied that it plans to invade. Banks and consumer staples contributed the most to the Australian benchmark’s advance. A2 Milk was the top performer after saying its outlook for 2H revenue has improved. Tyro Payments was the worst performer after its net loss widened in the first half of the year. In New Zealand, the S&P/NZX 50 index rose 0.1% to 12,156.34.

In currencies, the dollar pared losses against other Group-of-10 currencies after the Kremlin said there are “no concrete plans” for a summit between between U.S. President Joe Biden and his counterpart Vladimir Putin. Risk-sensitive currencies such as the Australia dollar halted their march higher and European stocks flipped to losses after the comments. Bloomberg Dollar Spot Index retraced some losses, to trade 0.2% lower. Cash Treasuries are closed for a holiday. EUR/USD gained as much as 0.6% to 1.1390, before paring to 1.1362; EUR/JPY rises 0.2% to 130.49 after gaining 0.5% earlier. Prices charged for goods and services in the euro area jumped by a record amount in February. Both manufacturers and services providers saw output improve, according to purchasing managers indexes compiled by IHS Markit. AUD/USD gained as much as 0.6% to 0.7223 helped in part by leveraged shortcovering against the yen. USD/SEK fell 0.5% to 9.3532; Riksbank governor Stefan Ingves said that policymakers can “wait before adjusting monetary policy” in minutes from the Feb. 9 rate decision, released Monday.

In commodities, WTI and Brent were choppy in which the latter eventually fell beneath the USD 90/bbl as some of the geopolitical risk premium was unwound by reports of a potential Biden-Putin summit. Saudi Arabia’s crude stocks rose 2.284mln bbls to 134.7mln bbls in December and its exports fell by 12k bpd M/M to 6.937mln bpd in December, according to JODI data. Saudi Energy Minister said OPEC+ believes it has delivered for members and the entire industry, while he added that they have been transparent but are not getting reciprocity. There were also comments from the Iraq Oil Minister that OPEC+ need to stick to the current agreement to avoid surprises and the Kuwait Oil Minister said that OPEC+ is very sensitive on how markets react. Furthermore, the UAE Energy Minister said tensions are the cause of high prices not supply and demand, while he hopes for de-escalation for oil prices to decline. European Commission President von der Leyen told CNBC that energy sanctions against Russia are still an option if Russia invades Ukraine. She said “everything is on the table” when asked about the possibility of imposing sanctions on Russian gas giant Gazprom. She said Europe imports around 40% of its gas supply from Gazprom. Spot gold failed to sustain an incursion above the USD 1900/oz level. Copper futures were rangebound amid the ongoing geopolitical uncertainty.

There is nothing on today’s US calendar due to the President’s Day holiday while Canada observes Family Day. We get the latest Eurozone & UK Flash PMIs,  linken/Lavrov Meeting (Date & Time TBC), EU-UK Brexit Meeting.

Top Overnight news from Bloomberg

• The U.S. has told allies that any Russian invasion of Ukraine would potentially see it target multiple cities beyond the capital Kyiv, according to three people familiar with the matter
• Oil gave up early gains in Asia, along with gold, after the U.S. and Russian presidents agreed to a summit meeting over Ukraine
• Saudi Arabia’s energy minister said that OPEC+ must stay together for the long-term stability of the oil market
• Prime Minister Boris Johnson is set to announce an end to England’s Covid-19 regulations on Monday, a day after the U.K.’s 95-year- old monarch Queen Elizabeth II tested positive for the virus

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks traded mostly negative but off their lows as risk appetite hanged on the situation surrounding Ukraine and with US and Russia said to agree in principle to a French proposal for a Biden-Putin summit. ASX 200 rebounded into the green with the index also cushioned by the reopening of Australia’s borders. Nikkei 225 retreated beneath 27k amid early haven flows into the JPY and deterioration of Japanese PMI data. KOSPI suffered after daily COVID-19 cases topped 100k for a third consecutive day Hang Seng and Shanghai Comp. were lacklustre with weakness in property names amid a further slowdown in property prices and after Zhenro Properties warned it may not be able to meet debt payments. US equity futures initially declined on US warnings of an imminent Russian invasion of Ukraine but then recovered due to hopes of Biden-Putin summit. European equity futures are indicative of a firmer open with the Euro Stoxx 50 future +0.4% after cash markets closed lower by 1.0% on Friday

 

In FX, the DXY was initially kept afloat by early haven flows after US warnings of an imminent Russian invasion on Ukraine, but retreated beneath 96.00 after France’s proposal for a Biden-Putin summit was agreed in principle. EUR/USD nursed most of Friday’s losses and climbed above the 1.1350 level amid the recent Dollar swings. GBP/USD reclaimed the 1.3600 status amid USD softness USD/JPY was choppy around 115.00 although JPY-crosses rebounded as risk sentiment somewhat improved Antipodeans found reprieve from hopes of a de-escalation of Ukraine tensions to lift AUD/USD and NZD/USD above the 0.7200 and 0.6700 handles, respectively. RUB gained against the Dollar amid reports of a potential Biden-Putin summit.

In commodities, WTI and Brent were choppy in which the latter eventually fell beneath the USD 90/bbl as some of the geopolitical risk premium was unwound by reports of a potential Biden-Putin summit. Saudi Arabia’s crude stocks rose 2.284mln bbls to 134.7mln bbls in December and its exports fell by 12k bpd M/M to 6.937mln bpd in December, according to JODI data. Saudi Energy Minister said OPEC+ believes it has delivered for members and the entire industry, while he added that they have been transparent but are not getting reciprocity. There were also comments from the Iraq Oil Minister that OPEC+ need to stick to the current agreement to avoid surprises and the Kuwait Oil Minister said that OPEC+ is very sensitive on how markets react. Furthermore, the UAE Energy Minister said tensions are the cause of high prices not supply and demand, while he hopes for de-escalation for oil prices to decline. European Commission President von der Leyen told CNBC that energy sanctions against Russia are still an option if Russia invades Ukraine. She said “everything is on the table” when asked about the possibility of imposing sanctions on Russian gas giant Gazprom. She said Europe imports around 40% of its gas supply from Gazprom. Spot gold failed to sustain an incursion above the USD 1900/oz level. Copper futures were rangebound amid the ongoing geopolitical uncertainty.

Fixed income:

• 10yr UST futures gained at the open on the concerns of an imminent Russian invasion of Ukraine but then returned flat after news that the US and Russian presidents agreed in principle on a French proposal to conduct a Biden-Putin summit, with the closure North American cash markets on Monday also limiting price action for Tnote futures. Bunds pared the majority of opening gains and breached support near 166.50, while 10yr JGBs were kept afloat by the mostly risk averse tone and with the BoJ present in the market for over JPY 1.3tln in 1yr10yr maturities

Ccentral banks:

• Powell will give his regular semiannual monetary policy update to Congress on March 2 before the US House Financial Services Committee and on March 3 before the Senate Banking Committee, according to Reuters.
• Fed’s Brainard (voter) said it is appropriate to begin a series of rate hikes in March and believes they will turn next to the balance sheet runoff, which she sees starting in the next few FOMC meetings, according to Reuters.
• JPMorgan Chase & Co. economists said the Fed is likely to hike interest rates by 25bps in nine consecutive meetings in an effort to tamp down inflation, according to Bloomberg.

We conclude the morning wrap with the latest comments from DB’s Jim Reid

For the second Friday in a row, the US repeated their warnings that Russia has made up their mind to invade Ukraine and that it would likely occur within days. This after trading hours press conference from Biden cited “significant” US intelligence to back up his points without detailing any of it.

Indeed the weekend news looked quite bleak until Macron’s phone call yesterday afternoon with Putin. Afterwards the French side debriefed the world by saying both parties agreed that a diplomatic solution was needed and that the foreign ministers of both nations would have further talks this week. Putin also told Macron that his troops would eventually leave Belarus even though Russia has earlier said that the military drills that were due to end yesterday would continue indefinitely and that there would be no withdrawals of troops as planned.

Overnight news has come out that Macron has brokered a summit between Biden and Putin for later this week. The agreement was reached following two separate phone calls that Macron had with the US and Russian leaders. US White House officials have confirmed this and said that Biden had accepted the meeting “in principle” but it would occur only under the condition that Russia does not invade Ukraine.

Overnight in Asia, equity markets pared early losses on the news with S&P 500 futures swinging from -0.5% to +0.5%. The Nikkei (-0.75%) has retraced some of its losses, after sliding -2% near the open with the Hang Seng (-0.67%), Kospi (-0.45%), Shanghai Composite (-0.40%) and CSI (-0.62%) also improving after a weaker start.

Even though the newsflow has improved, weekend sentiment was poor with UK PM Johnson suggesting that Russia was planning “the biggest war in Europe since 1945”. In addition, Johnson gave more specific info from his conversation with Biden on Friday highlighting that “You’re looking at not just an invasion through the east, through the Donbas, but according to the intelligence that we’re seeing, coming down from the north, down from Belarus, and actually encircling Kyiv itself, as Joe Biden explained to a lot of us,”. So the proposed summit will improve sentiment today but a lot of things are bubbling under the surface.

Elsewhere in Asia overnight, shares of Chinese developer, Zhenro Properties Group Ltd dropped as much as -17% in Hong Kong after the company in an exchange filing on late Friday (February 18) mentioned that it may not have enough cash to meets its debt payments next month, thus raising concerns that China’s property-sector cash crunch is far from over.

In terms of markets its again worth highlighting the table from our equity strategists that I borrowed for my chart of the day last week. It shows the declines in the S&P 500 around geopolitical events, where typically the selloffs have been short-lived (and around -6 to -8% on average), with a duration of around 3 weeks to reach a bottom and another 3 weeks to recovery from their prior levels. Another pattern is that ultimately, the underlying economic context tends to dominate, so if you believe the template, much might depend on what you thought momentum was before the sell-off. Here’s a link to my chart of the day.

Away from geopolitics, one of the most remarkable events this week could be the likely announcement today, here in the UK, that those catching covid will no longer have to legally self-isolate from later this week and that we will move to a learn to live with the virus regime. I say remarkable as it’s only around 2 months ago that Omicrom dropped onto an unsuspecting world, causing widespread panic and phenomenal levels of infections. However severe illness and fatalities have been relatively low and at some point the plunge towards normality has to be made. Other countries will watch with interest even if this move has been brought forward due to domestic political considerations.

In terms of data, we start today with a US holiday (Presidents’ Day) but we will have the global flash PMIs which will be interesting as activity tentatively bounces back after the Omicron wave recedes. The US equivalent comes out tomorrow. Earlier this morning, Japan’s flash manufacturing PMI grew at the slowest pace in five months in February, dropping to +52.9 from +55.4 last month. At the same time, services contracted at the quickest pace since May 2020 after the index fell to 42.7 from 47.6.

Back to this week and there’s plenty of Fed speak but it seems we’re in a holding patterns where the Fed don’t yet know whether they are going to hike 25 or 50bps next month. That decision will probably wait for more data and outside of Bullard there hasn’t been a huge appetite for 50bps from the committee. However plenty of time for that to change. Interestingly the favoured Fed inflation measure, the PCE deflator, comes out on Friday so that might be important. DB expects the core PCE to be 5.5% YoY. Durable goods is also out on the same day and we’ll have consumer confidence tomorrow and final UoM sentiment on Friday. Both have been very weak of late due mostly to inflation. Thursday sees preliminary Q4 US GDP which will set the tone for how we think about Q1 growth.

In Europe we have German Ifo tomorrow, final January Europe Area CPI on Wednesday and preliminary French CPI and PPI for February on Friday. The rest of the day-by-day week ahead is at the end as usual on a Monday.

Geopolitics was the order of last week, with an associated global risk off. In equities, the STOXX 600 fell -1.87% (-0.81% Friday), the DAX -2.48% (-1.47% Friday), the CAC -1.17% (-0.25% Friday), and the S&P 500 was down -1.58% (-0.71%). In fact, the S&P 500 was approaching correction territory by the end of the week, down -9.33% from all-time high set in early January. Volatility remained near year-to-date highs at 27.68ppts.

Digging deeper, banks underperformed in both regions after a good run as yields and rate hike expectations were pared back, with the STOXX banks index down -5.07% (-0.37%) and S&P banks down -2.79% (-0.25%). Tech stocks also slightly underperformed in the US, as the NASDAQ retreated -1.76% (-1.23% Friday).

Along with the turn in risk sentiment, a lack of further hawkish surprises from global central bank speakers helped push sovereign bond yields lower. In Europe, the declines were large across the curve, with 2yr gilt and bund yields falling -14.9bps (-7.0bps Friday) and -15.4bps (-4.9bps Friday) while 10yr gilts and bunds fell -16.7bps (-8.5bps Friday) and -10.5bps (-3.9bps Friday), respectively. The front-end declines were impressive given the UK CPI print, which printed at the highest level since 1992 (+5.5%), and above consensus expectations. However, traders appeared to be positioned for a blockbuster beat like the recent US print, and a commensurate tightening in near-term policy. 2yr gilts fell -13.0bps the day of the print. The number of hikes for 2022 fell from 6.14 to 5.90 over the course of the week but it did hit 6.80 on Monday, only just below the 6.87 peak before the Ukraine situation took a turn for the worse. So almost one 25bps hike taken out from the Monday highs to the close on Friday.

Staying in the same theme, the minutes of the FOMC’s January meeting were in line with previous expectations for policy. However, details about the size of prospective rate hikes or the pace of balance sheet unwind were not forthcoming. Traders expecting a further hawkish surprise were left wanting, and the probability of a +50bp rate hike in March fell to +27%, its lowest level since the January employment and CPI data.

Later in the week, President Williams and Governor Brainard, two influential voices within the FOMC, more or less confirmed liftoff was coming in March. Governor Brainard also offered expectations that the QT would begin in the next few meetings, while guidance to date had only been for sometime “later this year.” All told Treasury yield moves were smaller than European sovereigns, with 2yr and 10yr yields falling -3.4bps (-0.1bps Friday) and -0.9bps (-3.3bps Friday), respectively. To be fair they had already rallied hard late last Friday evening when the Ukraine situation worsened so there wasn’t the same catch up that European bonds witnessed.

In commodities, haven assets like gold outperformed, gaining +2.16% on the week (flat Friday), just below its highest level in a year. Energy prices fell, with European natural gas prices falling -7.52% (-1.54% Friday) despite the escalation in tensions. Brent crude oil, having fluctuated with headlines all week, wound up little changed, on net, decreasing -0.88% (+0.94% Friday).

Elsewhere, the U.S. Senate passed a stopgap funding bill that will keep the US government open and funded through March 11. Existing home sales in the US sold at a faster pace in January than expected, with 6.5m sales versus expectations of 6.1m.