Weekly Focus – Optimism in the Markets Despite War Dragging Out

Despite Russian officials calling for less military operations around Kyiv, fighting has continued widely across Ukraine this week. Ukraine has signaled it would be willing to give up its aspirations to join NATO, and block western states from placing military bases or nuclear weapons on its grounds. Despite this, it has also aimed to gain bilateral security guarantees for example from the US or some of the larger European countries, which we consider unlikely. Another key remaining issue is the eastern Donbass area, where Russia appears to increasingly focus on. Media reports with regards to Ukraine’s willingness to make any territorial concessions have been mixed, but we do not see how Russia could spin the results from its ‘special operation’ as a win domestically without gaining control over at least the regions in Eastern Ukraine. Despite the optimism we have seen in the markets recently, we think the war is still unfortunately far from over. Read our latest take in Research Russia-Ukraine: Talk is cheap – we expect no immediate breakthrough in peace talks but market focus to shift elsewhere, 31 March.

As the war drags on, central bankers appear increasingly open for front-loading rate hikes to tame the inflationary pressures. This week, we updated our Fed call, and now look for three consecutive 50bp hikes in May, June and July, and expect Fed Funds Target Range to end the year at 2.50-2.75%. Despite markets pulling back on the rate hike pricing and yields moving lower this week, we think that further tightening in financial conditions will be needed. Read the in-depth update at Fed Update – Quickly back to neutral by front-loading rate hikes, 30 March.

Energy price volatility continues, with oil prices moving lower this week on the back of the US announcement of largest Strategic Petroleum Reserve (SPR) release in history. 1 million barrels of reserves will be released per day, over the upcoming six month period, but as this will not be enough to compensate for the expected drop in Russian supply, we maintain our view of elevated crude oil prices going forward, read more in Oil comment – ​​Oil prices to remain elevated despite the SPR release, 31 March. Natural gas prices, in contrast, have moved modestly higher, as Russia has threatened to cut off Europe’s gas supply unless the buyers start settling their payments in rubles. EU members have called this a violation of contract terms, with the likely purpose of supporting RUB and making it increasingly difficult to sanction the remaining Russian banks. The deadline for switching the payment currency is today, but at the time of writing, the situation remains uncertain.

In China, the new lockdowns continue to weigh on activity, with PMIs falling to recession territory in March, signaling further weakness for the global economy and increasing supply chain challenges. Lockdowns will continue in Shanghai next week, read our latest take in COVID-19 Update: China sticks to its “dynamic zero covid”-policy, 31 March.

next week will be quiet in terms of economic data or events. From US we will have a range of Fed speakers as well as FOMC minutes from the March meeting, with focus on any hints about the upcoming QT announcement. ECB minutes will also be released alongside a range of European February hard data, which will however be mostly outdated due to the war. The Reserve Bank of Australia (RBA) will meet Tuesday morning, but despite the global inflationary pressures, we do not yet expect to see changes to their monetary policy.

Full report in PDF.

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