MARKET WRAPS

Watch For:

U.S. Trade data for January; Canada Trade data for January.

Opening Call:

Stock futures edged higher, while bond yields and oil prices rose, a day after fears of a recession pushed the Dow Jones Industrial Average into a correction.

Brent crude, the international oil benchmark, continued to climb higher on fears of a U.S. ban on Russian oil imports.

Investors are scrambling to analyze the likely broader impact of Russia's invasion of Ukraine and the hardening Western response. Market volatility has jumped as relations between the West and Russia have hit new lows, while soaring commodity prices have raised the prospect that global growth could take a hit and have muddied the outlook for central banks seeking to tame inflation by raising interest rates.

"I would say the market is in a state of shock. Given the tectonic shift we have seen, everyone is second guessing what the end game may be," said Brian O'Reilly, head of market strategy at Mediolanum International Funds.

The impact has been most dramatic in commodity markets, due to Russia's outsized role as a resource producer. Prices for oil, natural gas and key raw materials like metals and grains have soared, heaping pressure on businesses and households already feeling the pinch of rapidly rising inflation. Concerns that the U.S. could be poised to ban imports of Russian oil have sent crude prices soaring, driving fears of recession.

"Not every recession has been caused by an oil price spike but every oil spike has caused a recession," said Mr. O'Reilly. "This is likely to be a drawn-out affair and will have a sustained impact on commodity prices."

Investors are awaiting U.S. trade deficit data, due at 8:30 a.m. ET. Economists expect another record monthly trade gap for January, as consumers spent heavily and inflation pushed up prices.

Market insight:

Each time Russia and Ukraine come to the negotiating table and leave without a resolution, markets will grow more doubtful on whether one is achievable at all, Mizuho's rates strategists said. The latest round of peace talks between the two countries on Monday ended without a breakthrough, "leaving the market without any more clarity."

Given the pressure that rising energy prices will put on central banks over the next few months, Brent oil will continue to be an extreme market focus, Mizuho's strategists said.

Forex:

The "disorderly rise" in energy price is a significant reason why the dollar is rising while the euro and most other European currencies fall and this looks unlikely to change soon given the continuing conflict in Ukraine, ING analysts said.

"Along with the geographical vicinity and different correlation with risk sentiment, the disorderly rise in energy prices is what is generating a big divergence between the dollar (the U.S. is largely energy-independent) and most European currencies (the region is largely dependent on Russian oil and gas)," they said in a research note.

A rise in the DXY dollar index "seems plausible in the coming days." The DXY index hit a 21-month high of 99.4180 on Monday.

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MUFG said that although Europe looks less likely than the U.S. to restrict energy imports from Russia, the euro is vulnerable to the risk of Russia cutting off supplies of natural gas in retaliation against sanctions.

"The price of natural gas in Europe has already surged higher by almost 200% since the Ukraine conflict started, creating a significant headwind for growth in the euro-zone."

Having fallen to a 21-month low of $1.0807 Monday, the euro risks falling further towards chart support at around $1.0750 and then $1.0650, MUFG said.

Bonds:

The yield on the benchmark 10-Year U.S. Treasury note rose to 1.851% Tuesday from 1.748% Monday.

BlackRock prefers equities over both government bonds and credit, retaining an underweight on developed market nominal government bonds on both a tactical and strategic horizon, it said.

"Our preference for equities over both government bonds and credit keeps us positioned for a new market regime--one of investors demanding greater compensation, or term premium, for the risk of holding government bonds and one where we expect higher inflation in the medium term than markets are pricing," BlackRock said.

The asset manager remains overweight, however, in US Treasury inflation-protected securities, or TIPS, while it stays modestly overweight Chinese assets. "We like CGBs [Chinese government bonds] in particular for both returns and diversification," it said.

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Eurozone government bond yields were higher as concerns grow about rising inflation due to a jump in oil and gas prices and the risks that Russia's invasion of Ukraine poses to Europe's economy.

UniCredit Research said inflation concerns are reflected in a jump in breakeven rates--the difference between yields on nominal bonds and those of inflation-linked bonds--, which reveal concerns about energy delivery to Europe in the coming winter.

If market sentiment continues to deteriorate, a further increase in breakeven rates or a decline in real yields can't be ruled out, UniCredit said.

Commodities:

Oil prices rose on fears of a ban on Russian oil exports. Comments from German Chancellor Olaf Scholz on Monday are tempering gains. Scholz appeared to pour cold water on the idea that Germany would join a U.S.-led ban of Russian oil.

Still, analysts warn that there were no sources that could compensate for lost Russian supply. "There are not sufficient sources of incremental supply to cover a substantial prolonged loss of Russian oil (particularly the 4 million b/d Russian oil imports into Europe)," said S&P Global Commodity Insights.

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Brent prices have further upside, driven by the escalating military conflict in Ukraine, Goldman Sachs said.

There is a "growing realization that imposed sanctions could meaningfully and sustainably reduce Russian exports," the investment bank said. "Given Russia's key role in global energy supply, the global economy could soon be faced with one of the largest energy supply shocks ever."

Goldman forecasts a disruption of 1.6 million barrels/day to oil supply, and raises its 2022 Brent spot price forecast to $135/bbl from $98/bbl. It also raises its 2023 Brent forecast to $115/bbl from $105/bbl.

Read: Russian minister warns of $300 oil if energy sanctions are imposed .

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Gold rose in early European trade as prices of the precious metal edge closer toward the record $2,028.00/ounce set in August 2020.

"Too much uncertainty with commodity prices and economic growth prospects should keep gold prices supported until investors become optimistic that a negotiated end of the [Ukraine] war is in sight," Oanda said.


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03-08-22 0529ET