Sanctions – Actions speak louder than words as RUB rallies

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The movers on the market today

The market continues to focus on developments in Ukraine. Russia’s upper house of parliament yesterday authorized President Putin to deploy armed forces abroad, and as Putin noted that the region Russia considers independent is not limited to areas controlled by separatists, uncertainty in the short term remains high.

Geopolitics aside, it’s a quiet day in terms of economic data, with final Eurozone inflation figures for January due out. As for the central banks, de Guindos of the ECB and Daly of the Fed will be on the wires.

The overview in 60 seconds

Russian sanctions: All bark? As the situation worsened in Ukraine during the week (see more in Research Russia – Hope dies last – Nervous markets far from pricing in all-out war, Feb. 22), the market understandably turned its short-term attention towards the details of penalties. Yesterday, Biden announced that he would focus on 1) a few select Russian banks and 2) financing Russian foreign debt. Meanwhile, Germany naturally says that the certification of the NS2 will be suspended for the time being and that the EU will sanction Russian politicians. For the markets, this is a step back from earlier intentions to start at the top of the climbing ladder and USD/RUB fell from near 81.00 to highs at 78. .65, and Russian stocks are up about 10% from yesterday’s lows. Naturally, this also reflects the fact that at current levels the currency’s positioning is quite neutral and the credit premium is substantial – although of course it could always be repriced further.

Fleeing movement to safety: Yesterday’s session was very volatile, starting with an initial risk on geopolitical tensions, as the Bunds fell 5 basis points in a flight to safety. However, the markets quickly reversed with the Bund hitting 13 basis points during the afternoon from the morning lows. On the day, the Bund ended up 3bp. Front-end Germany posted the largest underperformance on sources that Deutsche Finanzagentur had started supplying additional bonds to the market, which left Schatz up 6 basis points on the day. The source’s story accelerated the trend of higher rates around lunchtime. Official communication is still pending. The fact that source stories have been floating around in the markets suggests that the pension squeeze we’ve seen in recent weeks has caught the attention of policymakers, but it remains to be seen how quickly they will eventually react to it.

The RBNZ increases by 25 basis points. The Reserve Bank of New Zealand raised interest rates by 25bp overnight, but signaled that more aggressive tightening may be needed. In terms of the balance sheet, RBNZ will begin “active QT” and plans to sell bonds from its portfolio in addition to not reinvesting maturing investments. Economic risks have faded since the previous meeting in November, and although the RBNZ decided not to reach 50 basis points this time, it clearly signaled that it could intervene at a later stage and also raised the point. end of the rate trajectory. NZD/USD rose overnight and while the impact of geopolitical tensions over commodities remains the main driver for NZD in the near term, markets haven’t discounted much more than 25 basis points per meeting at the future, leaving further upside potential for the NZD.

Shares: Stocks for the most part fell on Tuesday with geopolitics as the backdrop. The US gradually turned into a risky session, with all sectors declining and cyclicals underperforming. Real estate and healthcare are doing the best (also helped by falling yields) and consumer discretionary the lowest. Interestingly, energy companies were also among the worst performers. Presumably, because investors aren’t too worried about the future of Russian energy exports. Still, VIX has risen and is now just south of 30. S&P -1%, Dow -1.4%, Nasdaq -1.2% and Russell 2000 -1.5%.

FI: Yesterday was a very volatile trading session beginning with initial risk on geopolitical tensions with Bunds touching 5bps lower in a flight to safety move.

Effects : Correlation with non-RUB assets has spiked, EUR/USD included, as news flow has indeed intensified. Sanctions do not appear to start at the top of the escalation ladder, as otherwise communicated as an option.

Credit: While the CDS indices stabilized yesterday, cash bonds continued to sell. Itraxx Xover tightened by 2.3bp and Main by 0.8bp. HY bonds, on the other hand, widened by 6bp and IG by 5bp.

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