Despite ongoing skirmishes in Ukraine, risk assets post some signs of relief as the worst-case scenario for the Russian sting operation in Ukraine has been averted. Russian stocks rebounded shortly after the opening, RTSI rebounded 28%, MOEX added 12%, however later market sentiment started to deteriorate.Investors were scared that the local conflict in Ukraine would escalate into a direct confrontation between Russia and the West or that the West’s sanctions response would be harsher than expected, which has not yet happened. Despite the solidarity of the Western bloc in the need to give a “crushing” response, Russia has not been cut off from SWIFT yet, and sanctions on the energy sector have also turned out to be moderate. Given the already high prices for gas and oil, consumer inflation at a multi-year high in developed countries, shortages in the global energy market, which will not be able to adequately respond to a supply shock, sanctions on the Russian energy sector could well become a catalyst of contagion of the economic shock from Russia to the West.The dollar index is also correcting today after rising to almost 98 pts. on Thursday.Futures for US indices are in the red after a good start, European stocks try to regain ground in a mild pullback. The prospect of further development of risk-off sentiment will probably depend on whether Russia manages to carry out a blitzkrieg or whether the confrontation turns out to be protracted. The West will probably be forced to increase sanctions pressure, including due to public pressure.The latest data show that inflationary pressures are mounting more and more in the German economy. GDP for the fourth quarter exceeded the forecast by 0.4% and amounted to 1.8%, while import prices jumped by 4.3% in January against 1.6% forecast:French inflation also beat estimates in February – 3.6% against 3.2% forecast. Incoming EU price data shows that households are likely to face stronger price increases soon, raising the chances that the ECB will have to react sooner as policy starts to clearly lag inflation expectations. It also becomes clear that the EU is unwilling to impose sanctions on the Russian energy sector, since in this case an inflationary shock will not be avoided, and the ECB will have to rapidly tighten policy, which will likely derail the expansionToday, the focus is on inflation and consumption data in the US – Core PCE for January and durable goods orders. In January, inflation is expected to come at 5.1% (previous 4.9%), durable goods orders at 0.8%. An upside dovish impact of the military conflict in Ukraine on expectations for the March Fed decision and give some boost to USD, as well as longer maturity bond yields. However, the market is most likely not ready for a downbeat surprise, and weak January data will most likely shift expectations for the March decision towards 25 bp which could trigger some mild USD sell-off.
Source: Tickmill
