EMEA Morning Briefing: Ukraine Tensions Continue to Unsettle as Fed Eyed

MARKET WRAPS

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France Balance of Payments, Foreign Trade; UK Regional PMI, Business Finance Review; EU Eurogroup meeting of eurozone finance ministers; updates from Volkswagen, Prada, Talanx, Phoenix Group, Assa Abloy, Provident Financial

Opening Call:

Equities in Europe are set for a positive start Monday, but gains are seen capped as investors weigh the latest headlines on Ukraine. Asian stocks were mostly lower, along with oil and gold, while the dollar and Treasury yields advanced. U.S. stock futures edged higher at the start of a week in which the Fed is expected to raise its benchmark interest rate for the first time since 2018.

Equities:

European shares were poised for opening gains Monday despite heightened tensions over the war in Ukraine.

Investors in Asia remained on edge following news of a Russian airstrike on a Ukrainian military training center close to the Polish border that killed at least 35 and increased the risk of war encroaching on NATO territory.

The attack, about 10 miles from the Polish border early Sunday, was far to the west of where the conflict has been concentrated, and happened a day after Moscow had warned the West that it would consider arms deliveries to Ukraine as legitimate targets.

A large portion of the military aid from the West-one of the largest transfers of arms in history-passes through Poland into western Ukraine, part of the fine line the U.S. and its NATO allies are walking between aiding Ukraine militarily while steering clear of providing troops or enforcing a no-fly zone that Ukraine has called for.

Read more here.

Market Insight:

Capital Economics said commodity prices are likely to remain volatile in the coming weeks, as investors digest developments in Ukraine and its consequences for commodity markets.

"On balance, though, the risks to prices are still very much skewed to the upside, not least as the West could further tighten restrictions on Russia's commodity exports."

While events in Ukraine will very much be driving commodity price direction this week, China's activity data due Tuesday will also paint a clearer picture of Chinese demand.

"We think these data will come in weaker than the consensus expects, which would support our view that China's demand for commodities is set to remain soft this year."

Forex:

The dollar continued to strengthen in Asia as worries over the Ukraine war and this week's FOMC meeting dragged on sentiment.

Capital Economics expects a 25bp Fed hike this week and "continued commitment to an aggressive tightening cycle, which may reignite the dollar rally."

Currency markets are seeing higher implied volatility, said Corpay's Karl Schamotta and Karthik Sankaran.

"Expectations of rate-hikes this year are being recalibrated lower, but the relative pace of monetary-policy tightening across developed markets is still expected to favor the dollar," they said.

"G7 action on immobilizing Russia's huge reserve pile could lead to attempts by other countries to reduce dollar usage over time, but the extent of US-EU coordination will make it difficult as the euro is the only other comparable vehicle."

Unicredit Research said the euro-dollar exchange rate faces further volatility in the coming week.

"The conflict is seen as a drag mainly for the eurozone and Eastern European countries, and thus EUR/USD and [the Polish zloty, Hungarian forint and Czech koruna] are at risk of further significant fluctuations reflecting swings in market sentiment."

Other News:

TD Securities said buy USD/JPY, citing economic fundamentals and technical charts. The currency pair is a better expression of U.S.-centric risks, particularly the Fed, TD said, noting markets appear to be underpriced for 2023 rate increases and is a risk that may be realized in dot-plot at this week's FOMC meeting.

On charts, USD/JPY has nowhere to go but up, particularly now that 116.40 triple top has been breached, TD said, which entered a long USD/JPY position targeting 120.00 and a stop-loss order at 115.30.

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The Bank of England is likely to raise interest rates at its next meeting but sound cautious in its messaging about the pace of further rises, potentially weakening sterling, said BDSwiss Group.

The BOE is widely expected to raise its key rate by 25 basis points at its March 17 meeting, in line with February's rise. However, uncertainty over Ukraine means that there will be fewer policy makers voting in favor of lifting rates by a larger 50bps compared with last month when four out of nine officials backed such a move.

"That might lower the odds of a 50bp hike at the next two meetings, which would be negative for the pound," BDSwiss said.

Bonds:

The 10-year Treasury note yield remained firmly above 2% early Monday, extending its rise into a sixth straight session ahead of what is expected to be the first in a series of Fed rate rises.

"Given the focus on tamping down inflation, there is a fear that the Fed could move too fast and threaten growth," said Lindsey Bell, chief markets and money strategist for Ally.

"GDP growth could come under pressure in the coming quarters amid high inflation and weak consumer sentiment. The conflict in Ukraine is the wild card in this scenario. De-escalation will be necessary to reduce inflationary pressures."

Other News:

S&P said it was keeping Ukraine's 'B-/B' long- and short-term foreign and local currency ratings on CreditWatch with negative implications.

"The CreditWatch status indicates that we could lower the ratings if the military conflict were to significantly weaken Ukraine's economy," S&P said. It expects Ukraine's debt service and borrowing needs "will be fully covered by international financial support over at least the next 12 months."

However, S&P also said Russia's military intervention poses significant risks to Ukraine's economic growth, public finances and financial stability. S&P said "as the conflict continues, Ukraine's technical ability to use international financial support and meet its ongoing debt service obligations could erode."

Energy:

Oil prices were down around 2% in Asia, likely weighed by the latest Covid-19 developments in China, said ING.

"The rising number of cases has seen the city of Shenzhen go into lockdown. This will raise concern over the potential hit to demand. But also importantly, it suggests that China is not ready to let go of its zero-Covid policy."

ING also noted that ICE Brent speculators decreased their net long positions last week, signaling increased risk-aversion in the oil futures market.

Oil prices, which have been driven higher by the Ukraine war, may have been weighed by Vladimir Putin's reported comments that there are "certain positive shifts" in the negotiations between the two countries.

Metals:

Gold futures edged lower as hopes for progress in the Russia-Ukraine talks diminished the safe-haven appeal of bullion.

While Putin's comments are likely giving market participants hope that cease-fire talks are heading in the right direction, economic growth concerns are unlikely to go away anytime soon, hence gold's pullback should be limited, said OANDA.

Aluminum prices were lower too, reversing earlier gains that were spurred by supply disruption concerns, said ANZ.

The gains were mostly due to the U.K. announcing sanctions on Russian individuals, including Oleg Deripaska, who has a stake in state-owned mining company Rusal and after Rio Tinto said it was planning to stop shipments to a Rusal-owned alumina plant.

Read: JPMorgan Leads Talks to Contain Nickel Crisis Damage

Other News:

Fitch said nickel and aluminum prices are set to stay high on likely sizable disruptions to Russian production and exports of the industrial metals.

"We are expecting significant prolonged disruption in the coming months at least, which makes up 9% and 5% of global production, respectively."

It said that low global inventories of both metals, due to high electric-vehicle adoption, have made them particularly vulnerable to price surges. "Depleted inventories will be an important factor in the coming weeks as demand chases restricted supply."

TODAY'S TOP HEADLINES

Russian Prosecutors Warn Western Companies of Arrests, Asset Seizures

Russian prosecutors have issued warnings to Western companies in Russia, threatening to arrest corporate leaders there who criticize the government or to seize assets of companies that withdraw from the country, according to people familiar with the matter.

Prosecutors delivered the warnings in the past week to companies including Coca-Cola Co., McDonald's Corp., Procter & Gamble Co., International Business Machines Corp. and KFC owner Yum Brands Inc., the people said. The calls, letters and visits included threats to sue the companies and seize assets including trademarks, the people said.

JPMorgan Leads Talks to Contain Nickel Crisis Damage

Some of the world's biggest banks worked over the weekend to resolve a crisis in the nickel market that leaves them on the hook for billions of dollars owed by a Chinese metals giant.

JPMorgan Chase & Co., Standard Chartered PLC and BNP Paribas SA were among the banks and brokers seeking to reach an agreement with Tsingshan Holding Group, people familiar with the discussions said. Trades placed by the Chinese steel and nickel producer on the London Metal Exchange contributed to an uncontrollable rise in prices that led the exchange to halt trading and cancel eight hours' worth of transactions last Tuesday.

Hedge Funds' Commodity Bets Soar After Russia's Invasion of Ukraine

Hedge funds that placed bullish bets on commodities are notching sizable returns from the biggest rally in decades following Russia's invasion of Ukraine.

Soroban Capital Partners LP, a $10 billion stock-picking hedge fund in New York, is one of the biggest winners, making at least several hundred million dollars on the trade since February, a person familiar with the matter said. Other winners include New York macro fund Castle Hook Partners and value investor Pilgrim Global. The bet was that a yearslong drop in spending on new commodity supply and efforts to limit carbon emissions would push up materials prices and shares of producers, according to people familiar with the firms.

Russia-Ukraine War Threatens Wheat Supply, Jolts Prices

Russia's invasion of Ukraine threatens a big portion of the world's wheat supply and has sent prices on a dizzying ride to new highs as well as the sharpest weekly drop in years.

Wheat stockpiles were already running low and prices were the highest in years thanks to two years of poor growing weather when Russia's attack jammed up Black Sea trading and endangered nearly a third of the world's exports. The invasion prompted fears of food shortages in countries fed with imported grain and pushed prices to new highs.

Chip Makers Stockpiled Key Materials Ahead of Russian Invasion of Ukraine

Almost two years of chip shortages have had an unexpected upside for the semiconductor industry: It is better prepared to manage the turmoil caused by Russia's invasion of Ukraine.

Production of vital raw materials for chip making is concentrated in Russia and Ukraine. The countries are a major source of both neon gas, needed to feed lasers that print minute circuitry onto silicon, and the metal palladium used in later manufacturing stages.

Russia Asked China for Military Assistance, U.S. Officials Say

WASHINGTON-Russia has asked China for military equipment and other assistance for its war effort, according to U.S. officials, who didn't specify what Russia had requested.

News of Russian President Vladimir Putin's request for help from Beijing, first reported by the Washington Post, comes as Russia's war effort in Ukraine has been bogged down and as U.S. national security adviser Jake Sullivan heads to Rome on Monday to meet with a top Chinese official on the conflict inside Ukraine.

U.S. Won't Negotiate Ukraine-Related Sanctions With Russia to Save Iran Nuclear Deal

The U.S. won't negotiate exemptions to Ukraine-related sanctions on Russia to save the 2015 Iran nuclear deal and could try to strike a separate accord excluding Moscow, a senior U.S. official said, a diplomatic effort complicated by an Iranian missile attack on Iraq that sent American troops rushing for shelter.

With one of President Biden's top foreign-policy goals imperiled, the U.S. official said Washington would start exploring alternatives to the deal over the next week if Russia didn't back away from its demands for written guarantees exempting Russia from Ukraine-related sanctions that could curtail its future trade with Iran. Such guarantees could undercut the West's punishing array of sanctions leveled at Russia over the Ukraine invasion.

Crypto Aims to Boost Influence With Washington Hires

WASHINGTON-The cryptocurrency industry has staked out a spot at Washington's revolving door, hiring scores of former government officials and regulators as it seeks to shape policies to govern the largely unregulated market.

Those working for or advising cryptocurrency firms or investment funds include three former chairs of the Securities and Exchange Commission, three former chairs of the Commodity Futures Trading Commission, three former U.S. senators, and at least one former White House chief of staff, former Treasury secretary and former chair of the Federal Deposit Insurance Corporation.

China Pursues Afghanistan's Mineral Wealth After U.S. Exit

MES AYNAK, Afghanistan-Following the American exit from Afghanistan, China's move to claim the country's vast mineral wealth is centered on a mountain south of Kabul.

The mountain and the barren surrounding valley, in Logar province, a two-hour drive from the capital, contain one of the world's biggest untapped reserves of copper.

How Europe Hopes to Wean Itself From Russian Natural Gas

International efforts to sanction Russia for its invasion of Ukraine have magnified a long-running dilemma for the European Union: Its attempts to wean itself from coal have left it more reliant on Moscow for natural gas. This dependence has made it reluctant to support the kind of tough sanctions on energy exports that some say are essential for thwarting Russia's aggressions.

As part of its efforts to cut greenhouse-gas emissions, the EU has reduced its reliance on coal, the burning of which produces more carbon dioxide than oil or natural gas.

U.S. Talks to Ease Oil Sanctions on Venezuela Get Blowback

The Biden administration's interest in regaining access to Venezuelan oil is facing stiff opposition at home over concerns it would prop up an autocratic regime that is a close ally of Russia.

The pushback comes from both Republicans and many prominent Democrats, as well as Venezuela's U.S.-backed opposition, that recently warned officials in Washington it is a mistake to consider turning Caracas back into an energy ally without restoring democracy there first.

Russian Prosecutors Warn Western Companies of Arrests, Asset Seizures

Russian prosecutors have issued warnings to Western companies in Russia, threatening to arrest corporate leaders there who criticize the government or to seize assets of companies that withdraw from the country, according to people familiar with the matter.

Prosecutors delivered the warnings in the past week to companies including Coca-Cola Co., McDonald's Corp., Procter & Gamble Co., International Business Machines Corp. and KFC owner Yum Brands Inc., the people said. The calls, letters and visits included threats to sue the companies and seize assets including trademarks, the people said.

Russian Missiles Strike Ukrainian Military Training Base Near Polish Border

A Russian airstrike on a Ukrainian military training center close to the Polish border threw into sharp relief the hazards of the Western push to deliver arms support to Kyiv while avoiding direct conflict with a nuclear adversary.

The airstrike killed 35 people at the facility in Yavoriv about 10 miles from the Polish border early Sunday, far to the west of where the conflict has been concentrated, one day after Moscow warned the West that it would consider arms deliveries to Ukraine as legitimate targets.

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Expected Major Events for Monday

00:01/UK: Feb UK Regional PMI

06:00/FIN: Feb CPI

07:00/ROM: Feb CPI

07:00/ROM: Jan International trade

07:00/ROM: Jan Industrial production

07:00/SWE: Feb CPI

07:00/GER: Feb WPI

07:45/FRA: Jan Foreign trade

07:45/FRA: Jan Balance of payments

08:00/SPN: Jan Retail Sales

08:00/SVK: Jan Employment and average monthly wage in selected branches

08:00/SVK: Jan Turnover in selected branches of economy, incl Industry & Construction

08:00/CZE: Jan Retail trade

09:00/BUL: Jan Trade with third countries - preliminary data

09:00/BUL: Dec Trade with EU Member States - preliminary data

09:30/UK: Annual CPI Basket of Goods and Services annual review

09:30/UK: 4Q Business Finance Review

10:00/CYP: Jan Foreign Trade (provisional)

10:00/LUX: 4Q GDP

All times in GMT. Powered by Kantar Media and Dow Jones.

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This article is a text version of a Wall Street Journal newsletter published earlier today.

(END) Dow Jones Newswires

March 14, 2022 01:17 ET (05:17 GMT)

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