Talking and fighting -Breaking
(Reuters) – Diplomacy has been a frantic effort to resolve the Russia-Ukraine crisis. The leaders of the United States and European Union will be meeting, as will NATO allies. Meanwhile, both sides seek support from China.
The March Purchasing Managers Indexes may reveal the extent of economic uncertainty. Central banks are continuing to pursue different routes. Norway is likely to tighten, but China is poised to ease.
This is your market week in Singapore from Tom Westbrook, Lewis Krauskopf, Sujata Ranasinghe and Dhararanasinghe.
1. TALKING SHOPS
There have not been any breakthroughs between the sides as Russian planes bombard Ukrainian cities. Still, hectic diplomacy continues, across multiple fronts.
Russia has engaged the help of China and India, not only to export commodities that are exempt from Western sanctions, but also because it is a strong supporter of India, China, and other countries.
Volodymyr Zelenskiy, the Ukrainian president, is lobbying NATO and foreign parliaments for an international no-fly zone to be established over Ukraine. NATO continues to be wary of any direct conflict with Russia’s nuclear-armed arsenal. On Wednesday, NATO’s chief Jens Stoltenberg called it “a crucial moment for our security”.
The meeting will be attended by President Joe Biden. There will also be a midweek EU summit at Brussels. This is aimed to strengthen the relationship between the United States and its European allies.
However, the West runs the risk of creating rifts in relations with India and China. Both countries are not against Russian actions. India continues to buy more Russian oil and is studying the rupee-rouble payments mechanism. Biden calling China’s Xi Jinping would not affect China’s attempts to occupy space vacated from Russia by Western businesses.
Graphic: Maps: Tracking the Russian invasion of Ukraine Ukraine conflict map- https://graphics.reuters.com/UKRAINE-CRISIS/gdpzybkrlvw/bigmap.jpg
2. LITMUS TEST
This week’s flash PMI is here. It will provide a measure of how the effect of war in Ukraine on economic activity.
The PMIs generally have not fallen below the 50 level that distinguishes between expansion and contraction. A record-breaking slump in German investor motivation in March indicated that a possible recession is not impossible in Europe’s most populous economy.
The ZEW was not well-received by the markets. Instead, attention was shifted to central banks’ attempts to control inflation.
However, rising energy costs are threatening real incomes as well as consumption. A downbeat set of PMIs could signal that the recession alarm bells may be ringing.
Graphic: What impact will war in Ukraine have on the world economy?-https://fingfx.thomsonreuters.com/gfx/mkt/jnpwebmxzpw/theme1603.PNG
3/S&P 500 THEN AND NOW
On March 23, 2020, it emerged from an COVID-related plunge. Thanks to huge government stimulus and unimaginable support by the Federal Reserve, it has recovered 90%.
The markets now have a whole new set of concerns. Chief among them: whether the Fed, which lifted rates on Wednesday for the first time since 2018,– will be able to fight soaring inflation without driving the economy into recession.
This year’s 10-year Treasury yields rose by almost 70 basis points while the 2-year Treasury yields jumped 120 basis points. The gap between them, at around 20 bps each, could become negative and signal an impending economic recession.
Markets will be watching the Fed’s rate hike trajectory, which was more aggressive than most expected. The data includes PMIs and consumer sentiment. New home sales, durable goods, and new homeowner sales are also due. They may indicate whether the S&P 500 can claw back a year-to-date 8% loss.
Graphic: US stock market’s rebound from COVID-19- https://fingfx.thomsonreuters.com/gfx/mkt/lbpgnzkbkvq/Pasted%20image%201647449215498
4. THE HAWK & THE DOVE
Norway, the nation most developed out of all the block nations, was the first to adopt a post-pandemic tightening policy. They raised interest rates in September & December. The rate will rise to 0.75% on March 24th.
Banks expect four rate increases this year, with inflation exceeding the target of 2% and a 3.6% growth in GDP predicted for 2022. Ida Wolden Bache will preside at the upcoming meeting.
The Swiss National Bank meets every day and is not expected to show any hawkishness. Expect it to be patient and will not hurry to lift its -0.75% global rate.
While February’s inflation rate of 2.2% was the highest recorded since 2008, a tighter policy could lead to a greater appreciation for Swiss Francs, which is an important concern in an export-heavy country. Recent intervention by the SNB was rare and it also increased foreign currency purchases.
Graphic: Norway rate rise- https://fingfx.thomsonreuters.com/gfx/mkt/znpnenykzvl/Pasted%20image%201647547667197.png
5/BOTTOMS UP? China’s State Council assured that policy easing is possible and authorities would be more gentle on markets, giving Chinese stock their largest bounce in over a decade. Now, the challenge is to provide meaningful support and not spook investors about the economic state. The benchmark Prime Rates for Loans will be fixed Monday.
A policy of easing can also be achieved by banks reducing their reserve requirement ratios and/or moving the medium-term rates down in April, after they unexpectedly left them on hold. Investors need to get something very soon.
Graphic: China stocks- https://fingfx.thomsonreuters.com/gfx/mkt/gdvzybzddpw/Pasted%20image%201647548107794.png