This Week In Markets: 14th - 18th February 2022 (Russia Update, Fed Comments, US/UK Data Preview)

Hello, it is Sunday the 13th of February. I hope you are doing well and welcome to the look ahead for the week. And I'm going to encapsulate a couple of the key things of where we really finished last week, which will still be very much dominant factors for the week ahead, namely that what's going on with Russia and also that of rate pricing given the surprisingly high inflation reading we had last week from the US. And this balance between whether or not the Fed are going to hike 50. So going to get up to speed on those two themes. There's some other things as well. Goldman Sachs revised down their S&P forecast over the weekend. We've got updates on the Iranian deal, Brexit update. We've also got a lot of data coming out this week, namely from the States. We have retail sales, industrial production, FOMC minutes. And then from the UK, you've got jobs data, inflation data, and retail sales as well, all on the docket. So plenty for me to get you up to speed on. Don't forget as well, if you're not already subscribed to the YouTube channel, hit that subscribe button and press the bell icon to be notified whenever new content comes out. But look, let's get straight into this and talk about this story right here, which is the latest on Russia. And President Joe Biden had spoken to the Ukrainian leader on Sunday, so today, and said the US and its allies would act, quote, swiftly and decisively if Russia was to invade Ukraine. And this comes after an hour-long call between these two characters here, Biden and Putin. They spoke on Saturday The Kremlin characterized their conversations as businesslike and balanced. Nothing really material coming out of their conversations. Of course, this comes after US National Security Advisor Jake Sullivan— you might have heard this late on Friday when oil really went bid and equities were softening up a bit going into the close. And this came after he told a White House briefing that there were signs of Russian escalation at the Russian border— Ukrainian border. And Sullivan said it's possible an invasion could occur during the Olympics, despite speculation on the contrary. And of course, this comes after the mass troop buildup that we've seen and the risk of a military incursion over the border from Russia into Ukraine. So oil prices, as I mentioned, got a kick up in towards the back end of last week, and we, we jumped over $94 briefly in futures market. I put it on a weekly bar just to put in a bit of context then onto the multi-year picture, really. If I look over here on this, this ellipse, this is the 2014 price action. We of course ran into a bit of a short-term resistance last week up and around those highest levels in several years, back to late 2014. The latest news on Friday puts us above there, and obviously as we continue to watch this situation very closely any more material escalation could well see further bids come into energy. And psychologically, $100 obviously resides at around $6.10 above the current price where we closed in the futures market on Friday. And then you've got the peak of the price activity we were seeing of 2014, which would come up at $107.42. So can't discount these, of course. However, personally, I think that there's a little bit of curation on behalf of the US really, just given just the massive headache that, that's happening at the moment with Biden. He's being assaulted on so many different fronts at the moment. I think he needs to sound tough against Russia. Personally, I think the, the risk of an incursion from Russia is, is somewhat limited. I think they're doing this as all just part of a leverage play just to make Europe honest about just keeping, um, a, the status quo in terms of NATO's involvement in the likes of Ukraine, but also that of the Nord Stream 2 pipeline still in play as well. And we all know that really Putin holds a lot of the cards here. So I do see, um, the, the forceful invasion into Ukraine as somewhat a lower probability in my opinion. But nonetheless, anything to the contrary would of course see likely quite a dramatic further increase in the price of energy products in general, particularly gas prices as well as oil. Ukraine's foreign minister actually downplayed border tensions with Russia this weekend, saying that there's been no pivotal change in the outlook. German Chancellor Olaf Scholz meets with Putin on Tuesday. This comes after Macron, of course, was with Putin last week. Scholz's aides has said he has not given up hope that diplomacy can avert a war, although they are playing down expectations of any breakthrough. And I'd probably agree with, with that, not really looking for, for a breakthrough at this point in time. But of course, this is going to be a hot story to watch. So we'll continue to watch that with great vigilance. And of course, can, as you saw on Friday, be very important for overall multi-asset class kind of sentiment more specifically. Otherwise, just before I move on, don't forget to check out the AmplifyMe.com market-maker. That gives you access then to our daily market newsletter, which I put out at the end of every European trading day. I'll drop the link on this video, but feel free to subscribe to that if you want to be kept up to speed with all the latest things in markets. But elsewhere, we do have the Iran update. Russia's top diplomat at the Iran nuclear talks in Vienna said world powers have made, quote, significant progress as their negotiations to revive a landmark 2015 agreement enter the final stage. However, in other news I've just read this evening, a senior Iranian security official has said that progress in talks to salvage that deal have become more difficult as Western powers only pretend to come up with initiatives. So I think we've been here so many times before where it looks like they make progress, but inevitably it stumbles at the final kind of passage. Kind of feel like I'm siding with that again at the moment, and I'd say on the balance, although any type of deal would certainly be more perceived to be bearish for oil prices at the moment, on the hierarchy of, of kind of major themes in play, the Russia-Ukraine story is definitely more dominant at this present point in time. Elsewhere, other weekend news to be aware of, as I mentioned briefly, Goldman Sachs have lowered their forecast for US stock market returns for this year in the S&P now to 4,900. They were previously penciling in 5,100 by the end of the year. The prospect of aggressive monetary tightening essentially weighing on valuations is the summation of their rationale. They said though, and this is the kind of extremity of that view on the bullish and bearish case, that if inflation remains high and prompts the Fed to hike more than currently anticipated, the S&P 500 could decline by 12% to 3,900 or even slump to 3,600 if the tightening tips the economy into a recession, their strategists warned. Goldman Sachs, as a reference point, are currently looking for a rate hike at every meeting of this year, so 7 going forward. By contrast, if inflation recedes— so this is the other side of that, that call— if it recedes, inflation faster and fewer hikes are needed, the benchmark could rally to 5500 in their most bullish case scenario. So it gives you a bit of perspective there. Again, the base case now downgraded to 4,900 for the SPUs. Um, other things to be mindful of, of course, lots of movement in short-term rates and yields in the US following that red-hot inflation number that we saw. So the latest commentary that we've had comes from Fed's Daly, who is a non-voter, the head of the San Francisco Fed. She said it is paramount for the central bank to be measured and data-dependent as it starts lifting US interest rates to ensure stability. But she did reiterate that she does favor the commencement of the first rate hike at the March FOMC meeting. A bit of perspective: Citi, Deutsche, they're both backing 50 basis points. I think Credit Suisse is the same, HSBC as well leaning on the 50 side. But Daly appears to be much more skeptical and has suggested there is little need to start a cycle of increases with such an aggressive move. So although she's saying yes, we should go in March, She's kind of leaning more on the 25 basis point side of things. Markets, how are they priced at the moment? So lots of fluctuation of this, of course, after the inflation number. It briefly got up to 95%. We saw that fade through Friday, and we're currently now priced at around 50/50 for a 50 basis point rate hike in March. So a hike's definitely happening. To what size is really up in the air at the moment. And of course, ahead of that mid-March FOMC meeting, we do get one more inflation reading and some other important data points coming out of the US. Still a lot to play for there to determine really the outcome of this. One thing to be aware of, the St. Louis Fed President James Bullard, the one who's the most hawkish, he does speak on CNBC's Squawk Box Eastern time in the morning. And the reason why I'm, I'm bringing this to your attention is that he surprised markets last Thursday with his calls for the Fed funds rate to be at 100 basis points higher by July. Which would be akin to kind of 50 and some thereafter to squeeze that many basis points in over that shorter period of time. So he's going to be speaking again on Monday. You have Mester speaking on Thursday and then Waller, Williams, and Brainard, the vice chair, and she is speaking on US monetary policy. They will all be on Friday in terms of Fed speakers. Elsewhere, ECB just following in suit what we've had from Christine Lagarde, the president, last week. You've had the head of the Irish central bank, this chap here, and he has said over the weekend in an FT exclusive that investors are wrong to bet on eurozone interest rates rising in June, predicting that policymakers will be careful to avoid killing off the recovery. He added the ECB could stop its net bond purchases in June or a few months later and would only raise rates after that. So continues to just kind of reaffirm the points that were made from Lagarde from last week. Then on Brexit, kind of similar to what we had last week, the UK has signaled it could accept custom controls on goods destined only for sale in Northern Ireland, its first significant concession during months of talks with Brussels over those post-Brexit trading arrangements. But in terms of really the, the focus for, for this week, I would say much more for the UK will be on the data side of things. And the reason for that is we do have quite a bit of UK data coming out. So just to quickly run you through the calendar, on Tuesday you've got the unemployment data, employment change for the UK, UK CPI on Wednesday, UK retail sales coming Friday. From a top level, the unemployment rate is expected to tick down once again to, to 4% from previous 4.1%, so it's virtually where it was pre-virus now. CPI on Wednesday, probably the highlight of the three, is expected to remain at 5.4% in January. That does match then the 30-year high that we printed at the end of 2021. However, the impact of that reading might well be somewhat debatable, uh, given the general kind of path and direction of where inflation is heading. Most know that it's going to go further north for the time being and is set to peak close to 7% in April when, of course, those electricity price hikes start to feed through as well. So even though that number is going to be obviously a 3-decade high, maintaining at that level, it's probably not going to rock the market a great deal, or the perception on rates, or that of the price of sterling in the intraday market, given the fact that we're already there and we're already likely to go considerably higher in the months ahead. Then retail sales for the UK on Friday should see a bit of a bounce back. We had a very disappointing figure, um, at the, um, last month in terms of the end of 2021, It was almost like that figure was somewhat partially impacted, I guess, by the emergence of the Omicron situation, but also the front-loading of unseasonably early of Christmas shopping, which then meant that a lot of that was front-loaded in October, November, which contributed to a weak figure. So we are looking for a bit of an uptick there, but again, the future looks like household incomes are going to be stretched. The cost of living is going up, as we just mentioned, with inflation, particularly these electricity prices that's going to kick in as well in the months to come. So any positivity on the retail side, I don't think it's really going to have a meaningful impact for sterling this week. And then from a US perspective, quite busy. Tuesday you get PPI data coming out, and again expected to be pretty hot. It's expected at 9.1% year on year, but that is down from 9.7% if that were the case, um, that we saw in December, if it comes in in line. And then on Wednesday you get from the US retail sales, industrial production. Analysts at ING note that retail sales has been soft in recent months, but auto sales jumped in January and should ensure a decent overall gain. However, outside of that component, sales growth is likely to be softer given the Omicron variant clearly had a detrimental impact on consumer behavior, with a notable drop-off in restaurant dining, air passenger numbers, and mobility in areas of retail and recreation as well. As far as the industrial production number is concerned, analysts expect that to be kind of okay. The cold weather in January set to boost utility output as people try to just generally heat their homes given those weather conditions. And then Wednesday night we do get the Fed minutes. So as per usual, looking out for any new insights on the plans for rate hikes, the inflation outlook, any commentary on the balance sheet discussions. These types of things will be at the forefront of investors' minds. And from an earnings perspective, just to kind of wrap things up, um, not really too much going on. There's obviously a lot of companies, but nothing from a major weighted index point of view. But a couple that I'm looking at for the, for the coming days is going to be Roblox and Airbnb. I'm quite interested in just, although they're smaller companies, just given some of the focus on the metaverse and recent IPOs. NVIDIA is also reporting aftermarket on Wednesday, and that follows the collapse of the deal that we saw from SoftBank and Arm last week. And then you've got the retailer Walmart reporting pre-market on Thursday as well, which I'm always quite interested to watch their numbers when they hit the tape. But that is it. So I'll let you get to it and wish you a good week ahead. Any questions at all, feel free to drop me a comment, and I will see you for for the next session. All right, take care.