Geopolitics Dominate the World’s Financial Markets
Last week the world received a jolt in the early hours of Thursday morning as Russia launched its invasion into Ukraine. The search for safe assets accelerated, and the usual suspects benefited with the dollar, the Japanese yen and the Swiss franc gaining ground. The euro, in particular, suffered, giving back most of its recent gains whilst sterling also fell to its lowest level against the dollar this year. Over the weekend, the West has toughened its stance and imposed strict sanctions on Russia, its key officials, and its high-profile oligarchs. Most Russian banks have been shut out of the SWIFT messaging system, making it nearly impossible to conduct international business and cutting Russia out of the global financial system.
Following the weekend’s events, the Russian Rouble has gone into freefall, and the flight to safe assets continues in the currency markets, with the dollar a primary beneficiary. The markets have never seen such a large country cut out of the financial system, and the impact of such a bold move is yet to be fully understood. With geopolitics now wholly dominating the world’s financial markets, economic data will understandably be of secondary importance for the near future. However, markets will settle and take notice of the fundamentals at some point. With the impact of the war in Ukraine still unfolding, today’s view of the week ahead is a little shorter than usual as the likelihood is that there will unforeseen developments politically that are more likely to drive the direction of currencies in the coming days.
With the flight to safe-haven assets continuing, sterling is likely to remain under pressure against the dollar in the days ahead. But with the war in Ukraine on Europe’s doorstep, the pound should continue to hold steady and probably appreciate against the euro. We have in prospect an unusually busy week from the talking heads of the Bank of England with all the members of its Monetary Policy Committee taking to the microphone over the next couple of days. Before last week’s events in Ukraine, the derivative markets were pricing in at least five more increases in the cost of borrowing this year. With energy prices now likely to spike even higher, it will be interesting to see how hard the Bank’s officials push back on this. Data wise, in common with the rest of the world, Markit will release its final takes on Manufacturing Purchasing Managers Indexes (PMI) tomorrow, Services PMI on Thursday and Composite PMI on Friday.
Out of the major currencies, the euro remains the most vulnerable due to Europe’s proximity to the ongoing war in Ukraine. Data wise tomorrow, Germany releases its inflation figures, and Eurostat will release the preliminary inflation on Wednesday. Data for Europe. With oil and gas prices rising sharply, these figures are arguably already out of date. However, with the European Central Bank meeting next week, a high figure may put further pressure on its council members to tighten policy just when they don’t need it. Also released are the Purchasing Managers Indexes across the eurozone, and the minutes from the last ECB meeting are published on Thursday. Finally, we will be listening out for Ursula von der Leyen and the President of the ECB, Christine Lagarde, for words of guidance through this troubled time.
Usually, the first week of the month is dominated by employment data culminating in the publication by the US Labor Depart of the Non-Farm Payroll data at the end of the week. With the Russian assault on Ukraine likely to continue through the week, they will now be of secondary importance to the testimony from Federal Reserve Chairman Jerome Powell when he faces the House and Senate banking committees on Wednesday and Thursday this week. With the US and its economy now in a very different place to where it was at the time of the Federal Reserve’s last meeting, he is likely to be more cautious and less hawkish than he was then. There is also a packed data docket starting tomorrow with ISM’s take on Manufacturing which they follow up on Thursday with Services. As we mentioned earlier, unemployment is the key data starting with ADP’s white-collar report on Wednesday, followed by the weekly jobless report on Thursday and finishing with Non-Farm Payrolls on Friday, which again are expected to show a good increase in employment.