Uncertain week ahead: Nervous markets hold their breath as Ukraine-Russia tensions reach boiling point
Despite Friday’s weakness European markets still managed to finish the week higher, with the FTSE100 finishing higher for the second week in a row.
For US markets it was a week of two halves, with a decent first half undermined by two days of sharp losses, which were prompted by an unexpectedly hot January CPI report, which saw US inflation surge from 7 per cent in December to a new 40 year high of 7.5 per cent.
Looking at the week ahead, Michael Hewson, chief market analyst at CMC Markets UK, pointed out that last week’s inflation report “appeared to spook” St. Louis Fed President James Bullard who said that he favoured a 50bps hike in March, with two more of 25bps each by July, while also suggesting that the central bank should hold an emergency meeting and hike early.
“Not surprisingly these comments prompted a sharp rise in bond yields across the board, and while other Fed members appear to be more relaxed about recent data, there is little doubt that the possibility of a much more aggressive Fed response on rates is already getting priced into markets,” Hewson said.
At the weekend, Mary Daly of the San Francisco Fed was slightly more cautious saying a too aggressive approach to monetary policy could be destabilising all by itself.
“This caution also chimed with comments at the end of last week, from Loretta Mester of the Cleveland Fed and Raphael Bostic of the Atlanta Fed, who expressed reservations about a 50bps move, although they were both careful not to rule it out,” he said.
“With other Fed members coming across as less concerned about last week’s inflation numbers it will be interesting to see if Bullard reins back some of his hawkishness when he speaks later today, when he speaks on CNBC,” Hewson noted.
“Nonetheless the inflation story remains the topic du jour for markets this week, with the latest UK inflation report for January due on Wednesday likely to be a key determinant in whether we see a third-rate hike in succession from the Bank of England next month,” he continued.
“Before we get to that, markets appear slightly more concerned about events on the Russia, Ukraine border, which saw oil prices rise sharply late on Friday to new 7-year highs, and which have continued to rise in Asia markets, this morning.”
“The rising tensions also saw bond yields slip back, while US stock markets closed sharply lower on Friday, and has translated into sharp falls in Asia markets.”Analyst Michael Hewson
Friday’s move lower in US markets appeared to coincide with comments from US National Security Advisor Jake Sullivan who urged any remaining Americans in Ukraine to leave immediately, and that a Russian invasion could come any day.
The US also ordered the departure of all US soldiers in Ukraine to leave the country immediately in case they get caught up if hostilities break out.
“This escalation in tension coming as it did at the end of another turbulent week, saw investors adopt a safety-first approach ahead of the weekend, and looks set to translate into a lower open for markets in Europe this morning, given the weakness being seen in Asia markets,” Hewson concluded.