Daily Market Comment – Stock markets tank but FX doesn’t get the memo



  • Equities get hammered until US-Russia meeting calms some nerves
  • Yen advances but broader FX market almost immune to tensions
  • Iran nuclear deal draft keeps oil in check, Fed speakers in focus
Geopolitics running the show

A series of reports about shelling attacks between the Ukrainian army and Russian-backed separatists injected another dose of uncertainty into global markets. Equities suffered the most damage, with the tech-packed Nasdaq losing almost 3% as traders unloaded riskier assets. 

By contrast, safe havens came back in vogue. Gold prices took to the skies, propelled higher by demand for protection against geopolitical accidents and the pullback in real Treasury yields as investors also took shelter in bonds. Similarly, the retreat in yields served as a shot in the arm for the yen, which is a prisoner to moves in foreign rates because the Bank of Japan refuses to abandon its yield curve control. 

But besides the yen, the rest of the FX market was surprisingly calm. The dollar could not capitalize at all on the geopolitical distress, and was even outmatched by risk-sensitive currencies like the New Zealand dollar. Even the euro did not get hit as hard as one would imagine with brewing trouble in Europe’s backyard and stock markets sinking. 

Mood improves, but perhaps not for long

On the bright side, the mood has improved today following news that the top diplomats of America and Russia will meet next week to try and resolve the situation peacefully. This meeting was interpreted as a sign that war might not be imminent after all, which gave some brave traders the green light to buy another dip.

The problem is that diplomatic efforts have failed so far, and that’s unlikely to change until there’s a compromise on the table that saves face for both sides. It is clear by now the American game plan is to scream from the rooftops that Russia is about to invade as a strategy to deter the invasion itself and prevent a ‘false flag’ operation from being used as a trigger. 

For the markets, the problem is that Monday is a public holiday in America. With the risk of an invasion casting such a long shadow, many traders might prefer to slash their risk exposure and deleverage further heading into the long weekend. Hence, the relief from the diplomatic news might not last long. 

Iran deal almost done

Oil prices are headed for a substantial weekly loss as the prospect of Iranian supply hitting the markets soon has overpowered fears around Ukraine. The latest reports suggest the new Iran agreement has already been drafted and includes several steps before the sanctions are lifted. 

Admittedly, it is quite encouraging that oil prices haven’t gone into freefall on the news. This has been a huge risk for several months, and the fact it hasn’t hit oil prices even harder speaks to how thirsty the market is for energy. 

As for today, we will hear from the Fed’s number two and number three most important officials - Lael Brainard and John Williams. Markets are still pricing in a decent chance for a shock-and-awe 50 basis points move in March, even though most Fed officials don’t seem comfortable taking that gamble, fearful it would inject unnecessary volatility into asset prices. 

How this pricing evolves in the coming weeks could be the most important driver for the dollar, along with geopolitics. 

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