The week starts in a very turbulent way for the markets. In Asia, the stock exchanges are falling and so do the futures on Wall Street and in Europe, while the price of gold soars above 2,000 dollars an ounce and oil prices soar. The conflict between Russia and Ukraine, which seems destined to last for a long time, always dominates, while Vladimir Putin compares sanctions to an act of war.
Investors are also concerned about rising inflation and Brent oil is close to $ 140 a barrel, close to the record of $ 147.8 in 2008, and then traces above 130 on the increasingly insistent rumors of a possible ban on supplies of Russian crude oil. In Asia Tokyo fell by 2.94% and Hong Kong by 3.5%.
Futures on Wall Street are down, with those on the Nasdaq losing 1.7%, after closing in the red the previous week. Even worse are the futures on the EuroStoxx which sink by almost 3%, after having closed the octave just passed in deep red.
The United States and European allies are exploring the possibility of banning imports of Russian oilUS Secretary of State Antony Blinken reported yesterday and the White House has coordinated with major congressional committees to move forward with the ban. According to Reuters sources, even Europe, which relies heavily on Russia for natural gas and oil supplies, has become more open to the idea of banning Russian products in the last 24 hours.
Today there is a wait for the third round of talks between Moscow and Kiev. On the macro front, the focus is on industrial orders and retail sales in Germany. Foreign Minister Wang Yi will also speak at the Congress of the Communist Party of China. China, according to many observers, could run as a mediator to negotiate a ceasefire in Ukraine. Meanwhile, this week, the two key events will focus on next Thursday, when the ECB meeting and the release of US inflation data are scheduled. For the longer term, the spotlight is on the Fed meeting on March 15-16.
The risk of a stagflation weighs on the economic scenario
The strong volatility of the markets is linked to the fear that the war events and the upcoming rate hikes could slow down growth without being able to cool inflation. Fund managers who expect stagflation (GDP still and prices running) within the next 12 months have risen to 30% from 22% last month.
“Stagflation – says Antonio Cesarano, chief strategist of Intermonte Partners – in this context becomes an increasingly probable scenario, at least for Europe, even if it could subsequently also affect the US”.
The markets obviously do not like this prospect, but they also look at the opportunities that open up in front of them: the future reconstruction that will drive investments in infrastructure and energy diversification to accelerate the reduction of dependence on Russia.
In any case, stagflation will lead to a change of course in central bank policy, which will have to think less about monetary tightening and more about getting the economy going again. “The ECB will start first – says Cesarano – in a few months it could also be the turn of the Fed, which first, however, could try to start a short phase of rate hike / budget reduction”.
The ECB meets on Thursday
What will the ECB do this Thursday? Meanwhile, he will probably say that the impact of the war will soften monetary normalization. For this reason it could omit to give indications on the end of the Qe. So far it had said it would reduce purchases to 40 billion euros per month in the second quarter and 30 billion per month in the third, and then continue with 20 billion euros per month from October.
Unlike what seems to emerge as a widespread consensus within the ECB, the war scenario could now cancel the hypothesis of a stop on purchases from October. It is also possible that the ECB will implement a maneuver to increase liquidity in the markets, thus mitigating the negative impact that the sanctions and the ouster of some Russian banks from the Swift are having on the money markets.
Furthermore, the ECB will revise its growth and inflation estimates on Thursday. So far it has been leaked that European GDP growth this year could be cut by 0.3-0.4% due to the war. On inflation, the Eurotower will have to say whether prices will rise by around 2% in the next three years, or not. On interest rates, the ECB has recently no longer ruled out a rate hike at the end of the year. However, he has always said that first Qe must be ended and then rates must be raised. However, if an end date for Qe is not indicated, then implicitly the rate hike would recede.
Waiting for US inflation data, if it rises over 8% in February, there is trouble
Last week the data on European inflation were released, which in February reached a new all-time high: the average growth of consumer prices in the euro area reached 5.8% per annum. This is the highest since the launch of the single currency. The driving force was energy prices, which rose 31.7%, compared to 28.8% in January, but food prices are also overheating. And here too there is a hand in Russia, which is a large exporter of wheat and fertilizers. This Thursday, US inflation data will be released, which in February is expected to rise from 7.5% to 7.9% annually.
‘core’ inflation, the one with the exclusion of the more volatile data of energy and food goods, should rise from 6% to 6.4% per year. “If a figure comes out in line with expectations – explains Cesarano – the Fed will raise rates by a quarter of a point in March, as Powell hopes, if instead a figure higher than 8% were to come out, then the markets could enter the fibrillation , assuming a rate hike of 50 basis points “.
On March 16, it is the Fed’s turn to decide on rates and the balance sheet
On March 16, it will be up to the Fed to decide on rates and on the balance sheet. Powell this week was clear: leans towards a quarter point rate hike. The markets also expect at least 5 more hikes, 6 throughout this year and all gradual, of 0.25%. Powell also confirmed that the Fed will reduce its big balance sheet, which currently stands at 40% of US GDP.
In other words, the war has not changed his attitude. The Fed’s number one does not rule out that the war drives up inflation and assures that the central bank will take this into account, because its main objective at this stage is to cut it.
European capitals take flight to the US
“Today – explains Cesarano – if Kiev and Moscow find an agreement, we could be a little more optimistic, otherwise we will have another strong ‘flight to quality’, which then, in technical jargon, means that investors are afraid and hedge their risks, buying the assets deemed safest in these cases: Treasury, Bund, dollars and gold.
They already did this last week, sending German Bunds back into negative territory and gold at $ 1,961 an ounce. “On the other hand, apart from Russian assets, which went underground, raising the expectation of a Russia’s default, it was Europe that fainted.
“In the week to March 2 – notes Cesarano – there was the largest weekly outflow in history from European equities”. The reference is to the data published by Epfr, according to which, as of March 2, the outflow of equity capital from Europe was 6.7 billion dollars. What does it mean? That investors feel that Europe is at the epicenter of the Ukrainian crisis and send theirs to safety overseas.
“They bring money to the countries farthest from the war – explains Cesarano – Just look at the trend of the stock indices. The Russian invasion began on February 24. So, from February 23 to today, the EuroStoxx 600 has lost 10% , while the S&P 500, the main Wall Street index, gained 2% over the same period. The transfer of equity investments from Europe to the United States is evident. ”
“I believe that this trend will continue for a while – says Cesarano – also because Europe pays in euros for raw materials, which are denominated in dollars. The depreciation of the euro therefore leads to higher imported inflation, in turn affecting growth due to of the consequent loss of purchasing power “.