US and UK to block Russian oil

• The US and UK ratcheted up their economic pressure on Russia by announcing imports ban on Russian energy products. The US will immediately stop imports of Russian oil, natural gas and coal while the UK will phase in an import ban on Russian oil with the plan to take none by the end of the year. Sanctions on Russia in response to its war in Ukraine have so far carved out trade in energy and the US and UK response will acutely target one of Russia’s few remaining linkages to the global economy. Both countries have relatively low reliance on Russian oil as a share of their total imports so the impact on a material basis may not be too difficult to overcome. Nevertheless, with Russian energy largely viewed as an anathema to the global economy, the bans will contribute to a perception of further tightness in energy markets.
• The EU is reportedly considering joint bonds in support of higher defence and energy spending. Joint financing of military and energy systems would further the process of EU economic integration that was already accelerated during the Covid-19 pandemic when joint bonds were first announced. A more detailed plan may be delivered later this week when EU leadership holds an emergency meeting to assess Russia’s war on Ukraine.
• The US trade balance expanded to nearly USD 90bn in January, up from USD 82bn a month earlier. Signs of inventory building, which have helped support some near-term economic indicators—are pushing headline import growth higher as firms stock up as much as possible at time when global supply chains still remain disrupted. Both travel imports and exports, how much American spend abroad on tourism and how much they earn from tourists visiting, fell as Omicron weighed on travel decisions at the start of 2022.
• Factory gate inflation in China slowed somewhat in February with the PPI index slipping to 8.8% y/y from more than 9% in January. China’s government had been taking steps to ease domestic commodity prices by releasing more from reserves but the current run up in global commodity prices—whether energy, metals or agriculture—will likely add to domestic inflationary pressures. CPI inflation remains low, especially by the standard of other major economies, rising by just 0.9% y/y.

Today’s Economic Data and Events

19:00 US JOLTS Job openings Jan: forecast 10.95m

Fixed Income

• Benchmark government bond markets closed weaker overnight in the hope that a wind-down of the war in Ukraine could emerge quickly. Yields on the 2yr UST added 5bps to 1.5987% while the 10yr yield was up 7bps at 1.8456%. European bonds fell as markets grew optimistic that plans for joint-issuance of EU bonds for energy and defence spending would mean more economic and fiscal integration in the Eurozone. Italian spreads over comparable German bonds collapsed from 160bps to less than 150bps on the news.
• Emerging market bonds were sold off generally overnight. Yields on South African bonds jumped 31bps to 10.65% while some emerging European markets remain offered. Yields on Indian bonds rose from 6.88% to almost 6.9% on the 10yr by the end of trading.

FX

• EURUSD was the standout overnight, rising by 0.4% to 1.0899, as markets gave a strong endorsement to plans for joint-bond issuance. On aggregate, the Eurozone economies appears much stronger than some of its individual constituents and the war in Ukraine has seemingly prompted a move toward greater integration and cooperation.
• USDJPY rose by 0.3% to 115.67 with a slightly larger move in USDCHF to 0.9289. GBPUSD held relatively stable on the close, holding on to its new lower range at around 1.31 level.
• Commodity currencies were all weaker against the dollar. USDCAD rose 0.5% to 1.2885 while AUDUSD fell 0.66% to 0.7269 and NZDUSD fell 0.3% to 0.6806.

Equities

• Equity markets remained under pressure yesterday, albeit to a lesser degree than seen earlier in the week. In Europe, the CAC lost just -0.3% while the CAC closed flat and the FTSE 100 added 0.1%. However, these markets closed before the confirmation that the US would be banning imports of Russian crude, and they could well come under renewed pressure today.

• All three US benchmark indices dropped yesterday, with the NASDAQ, the Dow Jones and the S&P 500 losing -0.3%, -0.6% and -0.7% respectively.

• With the region, the DFM dropped -0.2% but the Tadawul (0.3%) and the ADX (0.6%) both closed higher. GCC equity markets have been relatively insulated from the global sell-off, instead buoyed by the sharp rise in oil prices in recent weeks

Commodities

• Energy markets responded to the US ban on Russian oil imports by moving higher but the gains were then quickly faded. Brent futures closed up 3.9% to USD 127.98/b while WTI added 3.6% to USD 123.70. A more meaningful effect on oil markets would be a plan from the EU to ban imports of Russian oil but so far that hasn’t been forthcoming. Natural gas prices remain highly volatile with drops of 20% and 18% respectively in UK and LNG prices.
• Gold prices extended their haven bid higher with the yellow metal settling above USD 2,000/troy oz while palladium continues to hit new record high levels, closing at moe than USD 3,000/troy oz. Both copper and aluminium closed lower while nickel showed immense volatility, trading at one point as much as USD 100,000/tonne after which trading was halted by the LME. The exchange would use the previous closing price in determining margin requirements.
• Wheat prices took a pause after rapid gains with both Hard Red and Soft Red wheat futures dropping overnight. Nevertheless, both remain near record high levels.

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