Midweek Market Podcast – February 16

Geopolitical risks and inflation worries dominated markets this week with rallies in safe haven assets and US 10-yr yields breaching 2.00%.

 

The Market Week – February Week 3   

Have the financial markets hit peak geopolitical risk nervousness? Russia has pulled some troops back from the Ukrainian border, but the West remains unconvinced. Yields, Oil and Gold prices all remain elevated. Inflation worries dominate with US (7.5%) & UK (5.5%) rates at 40- and 30-year highs, respectively. Still to come this week – FOMC Minutes today, AUD jobs tomorrow and plenty more Fedspeak.

Central banks continue their hawkish tilts as price rises continue to beat expectations and jobs markets continue to tighten. Key FED hawk James Bullard called for a 50bps rate hike from the FED in March and 100bps by July. The BoE could move again in March and even the ECB look to be raising rates before year-end.

Ukraine tensions and speculation over gas supplies to Europe in the event of an escalation of tensions with Russia continues to weigh on sentiment, notwithstanding the initial withdrawal of some Russian troops on Tuesday. The West continues to demand evidence of the de-escalation. Germany’s chancellor Scholz and the UK Foreign Minister Truss were both in Moscow and Kiev this week.

In FX the USDIndex rallied from 95.15, spiking at 96.40 on Monday to under 95.75 today. EURUSD plummeted from 1.1495 to 1.1275 before recovering to 1.1380 and USDJPY fell from 116.30 to 115.00 before retaking 115.50. Cable rallied to test 1.3645 before testing under 1.3500 and holds 1.3570.  Sterling remains vulnerable to bouts of risk aversion and the PM remains under severe political pressure.

US stock markets had another volatile week with the USA100 once again the weakest, remaining some way below its 200-day moving average, whilst the USA500 and USA30 test this key level from below. The driver remains the FED, and the speed and how far they are likely to raise interest rates. The chance of a 50bp rise in March rose as high as 72% on Friday; it has since cooled to 38% but the hawks are in control.

Gold rallied through $1830, $1850 and peaked just shy of $1880 as the geopolitical tensions grew earlier in the week. $1850 and $1830 now become key support levels if Friday’s major move higher is to be sustained, if not $1815 and $1800 once again come into play.

USOil prices continue to be supported by very tight supply, low inventories, and the geopolitical tensions. Prices peaked at $93.80 on Monday and remain elevated over $90.00. Today’s inventories are expected to show a drawdown of 2.2 million barrels on top of last week’s big 4.8 million barrel drawdown.

The yields remain the key driver of the markets once again, with the US 10-Year-2-Year yield spread at 26-month lows and the 10-year peaking at 2.060% on Friday and holding over the major 2.00% line in the sand.

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Stuart Cowell

Head Market Analyst

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