ASX futures were up 2.4 per cent, ahead of Monday’s open, but the contract last traded on Saturday morning, before North American and European nations unleashed another round of sanctions targeting Russia’s financial system.
On the local results rank today: Chorus; Dalrymple Bay Infrastructure
The local currency was +0.9% to 7226 US cents; the Bloomberg dollar spot index fell 0.5%; Bitcoin was trading near $US38,914.42
The yield on the US 10-year note was little changed at 1.97%.
NAB markets economist Taylor Nugent has flagged an ‘avalanche of data’ coming up in Australia this week, headlined by Q4 GDP on Wednesday, as well as the RBA’s March meeting on Tuesday.
“For Q4 GDP we look for 2.9 per cent q/q, which would see GDP more than recover the fall in Q3 (consensus is similar at 3.0 per cent). As for the RBA, the Bank will likely stick to its script of having patience given WPI at 0.7 per cent q/q was broadly in line with their February SoMP projections,” Nugent writes.
“Note those projections are consistent with the RBA considering a rate hike later in 2022 according to Governor Lowe, while in NAB’s view upside risks to their outlook mean the RBA is likely to hike multiple times by the end of the year. Also out in the week are the pre-GDP partials of Business Indicators on Monday and Net Exports on Tuesday. There is plenty of second-tier data too, but nothing to change the dial in terms of views on the economy.”
Thomas Mathews, markets economist at Capital Economics, says equities haven’t actually fallen that much since Russia invaded Ukraine.
“So there is probably limited scope for a ‘relief rally’ should tensions ease. And while many inter-state conflicts in recent decades have had limited market impact, this war is arguably the most significant since the Iraq-Kuwait war of 1990-91; as we discussed here, the experience from that period (in which major equity indices fell by 20-25 per cent) suggests there could be significant further downside if the conflict continues,” he writes.
“Meanwhile, the chance of a sustained period of poor returns from equities has probably increased. Stricter sanctions might well lead to some combination of higher-for-longer inflation, tighter central bank policy in the long run, and slower economic growth in developed markets. That would be a particularly toxic combination for equities. The ‘stagflation’ of the 1970s resulted in zero real returns from US equities for the best part of a decade; we don’t expect a re-run of that, but even ‘stagflation-lite’ would probably come alongside a long period of underwhelming gains in equities.”
LPL Financial takes a look at the VIX fear index on the back of the Ukraine invasion.
“The closing price for the VIX for the past two days has been close to 3 standard deviations above the 12-month average. At the January and February peaks, the VIX hit intraday highs of around 38 which if it had closed at those levels would been almost 5 standard deviation events.
“Like many other measures of market sentiment that we monitor extreme levels of volatility have historically had the potential to be contrarian signals when it comes to predicting stocks prices over the short term. When the VIX has closed more than 3 standard deviations above its 12-month rolling average the forward returns for the S&P 500 have tended to be well above average, and within the 3- to 6-month timeframe have been more likely to be positive than on average. This extreme level on the VIX last occurred on 1/25/2022.”
Local: MI inflation; Company profits Q4; Inventories Q4; Retail sales January; Private sector credit January; NZ ANZ business confidence
Overseas data: Japan industrial production January; UK nationwide house prices; US Chicago PMI; US Dallas Fed index
ASX futures up 166 points or 2.4 per cent to 7118 near am AEDT
Read today’s paper, exactly as it was printed, here
Russia sanctions to be felt in Australia The move to cut off Russian banks from the financial system will cause its currency to plunge, isolate the world’s biggest gas producer and boost the price of Australian energy exports.
West escalate sanctions as Russia intensifies assault Putin has escalated his assault on Ukraine amid an increasingly vigorous Western pushback that includes ramping up military aid and targeting Moscow’s central bank.
Market’s relief rally unlikely to last A rally at the end of last week could prove short-lived, as investors grapple with how to respond to the escalating conflict between Russia and the Ukraine.
A cohort of traders is rediscovering their fondness for Big Tech at a time of global stress, partly on a bet the Federal Reserve will be less aggressive in its tightening path.
“This was obviously a big shock, but the shock has boosted bets that the Federal Reserve will have more options in how fast it’s going to act,” said Ben Emons, managing director of global macro strategy at Medley Global Advisors in New York. “As a result of that, bulls are coming back from the sidelines, and money is rushing to the sector that was beaten down the most — tech companies with stable balance sheets and strong fundamentals.”
Money managers who downsized risk positions and amassed stock hedges in January and early February are earning their pay.
“If you’d been hedged at the end of the last week and you had closed those positions out, say yesterday morning around the open, in all likelihood yes — it would have paid off nicely,” said Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research.
The impact of the unfolding crisis in Ukraine will weigh on European stocks for months, Goldman Sachs Group Inc. strategists said on Friday, as they lowered their targets for the continent’s benchmarks.
“In light of the conflict, the rise in risk aversion – some of which will likely linger – and the impact on the growth/inflation mix, we take down our target prices,” Goldman strategists led by Sharon Bell wrote in a note to clients. The strategists now expect the Europe Stoxx 600 Index at 490 in 12 months, from 530 previously, with the new target implying virtually no full-year returns for European stocks in 2022.
The downgrade highlights the changing fortunes for European equities, which started the year on expectations that they’d extend their post-pandemic rally and outperform US peers in 2022 amid a global rotation to cheaper, so-called value stocks. The outperformance, fuelled by concerns that monetary policy tightening will hurt expensive US tech champions hardest, was all but wiped out by Thursday’s close.
“We are exploring opportunities to rotate exposures from continental European stocks into the FTSE 100 and emerging markets,” Paul O’Connor, head of multi-asset at Janus Henderson Investors, said in an email. “We are seeing interesting opportunities appearing in European credit markets, as investor outflows lift yields and spreads.”
The crisis in Ukraine is sending Asia’s stock investors searching for hedges and shunning names that may get hammered.
So far, Asia’s commodity and shipping stocks are emerging as safer bets. European countries may seek seaborne sources of natural gas as tensions escalate. That may mean more business for Korean shipbuilders including Daewoo and Hyundai which were up at least 10 per cent this week.
Meanwhile, shares of companies that get a chunk of their revenue from Russia, such as Japan Tobacco, are at risk of lower profits. The longer-term ripple effects will also be more complex: higher costs of basic goods will continue to squeeze consumers, limiting spending power. It also hurts margins for firms that are unable to pass on costs.
Potential supply disruptions mean emerging market food suppliers will see increased demand, said Nirgunan Tiruchelvam, the head of consumer equity research at Tellimer in Singapore.
Firms like Singapore-listed Wilmar International and Thailand’s Charoen Pokphand Foods may benefit, he added. Shares were down 5.7 per cent and 1 per cent this week respectively.
A growing number of Chinese firms with business in Ukraine or Russia say the impact from the region’s crisis is limited for now, as some sought to reassure investors, with the scale of Chinese investment in the region limited and dominated by state firms.
Treasury market liquidity was already on the ropes when this week’s crisis in Ukraine unleashed a wave of haven demand and a resurgence in price volatility.
By the latest measures, ease of transacting US government bonds “has retraced to levels last seen late in the winter of 2021 after a historically weak 7-year auction,” JPMorgan Chase & Co. strategists led by Jay Barry said in a Feb. 24 note. It’s approaching levels observed during “the worst of market dysfunction in the spring of 2020,” they wrote. Citibank strategist William O’Donnell on Friday described liquidity conditions as “still-challenging.”
S&P lowered Russia’s rating to ‘junk’ status, Moody put it on review for a downgrade to junk, and S&P and Fitch swiftly cut Ukraine on default worries.
S&P lowered Russia’s long-term foreign currency credit rating to ‘BB+’ from ‘BBB-‘, and warned it could lower ratings further, after getting more clarity on the macroeconomic repercussions of the sanctions.
“In our view, the sanctions announced to date could carry significant negative implications for the Russian banking sector’s ability to act as a financial intermediary for international trade, S&P said.
It also cut Ukraine’s rating to ‘B-’ from ‘B’.
Oil and gas is the best-performing sector in the S&P 500 index so far this year, with the likes of Marathon Oil among the biggest gainers. Similarly in Europe, energy and miners are the best performers of 2022 so far, defying a slump of 7 per cent for the Stoxx 600 index.
Edward Moya, senior market analyst, The Americas, at OANDA, writes that crude prices could hold.
“WTI crude has found tentative support at the $US90 a barrel and that could hold given how tight the oil market remains. Next week, OPEC+ is expected to stick to a gradual output increase strategy of 400,000 bpd in April, which when you factor in they probably won’t hit their quota, oil prices should remain supported,” he writes.
“Gold prices are back below the $US1900 level as risk appetite continues to stage a comeback despite a tremendous amount of uncertainty with the War in Ukraine. This week was quite the rollercoaster ride for gold prices and while it appears poised to finish the week slightly lower, the need for safe-havens still remains.
“Inflation will be a big focal point and the global turmoil that stems from geopolitical tensions should provide added motivation for some investors to hold gold. Gold should have strong support from the $US1875 level.”
Shane Oliver of AMP Capital says the Australian December half earnings reporting season is now largely complete and the overall impression has been positive.
“Companies have weathered the Delta and Omicron waves reasonably well. Supply shortages and rising inflation are causing significant issues, but most are managing costs and maintaining margins successfully. And outlook statements were more positive than negative. Beats have outnumbered misses, albeit by a narrower than normal margin,” he writes.
“There has been some slowing in momentum but only to around normal levels with 64 per cent of companies reporting profits up on a year ago. 54 per cent have raised dividends which is less than the average of 59 per cent. 48 per cent of companies have seen their share price outperform on the day they reported, but this is less than the norm of 54 per cent. The greater number of beats though and the generally positive outlook has seen consensus earnings growth expectations for the current financial year revised up from 13.1 per cent early in February to 14.9 per cent driven by energy, materials, financials & utilities.”
Strategists at Goldman Sachs Group advocate a rotation to Australian equities and recommend being overweight on the energy sector.
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