The war in Ukraine, and its fallout, remains central for markets.
How much more pain is about to hit Russia’s economy? Can oil rise even higher? U.S. inflation data is due on Thursday, the same day the European Central Bank holds a crucial policy meeting.
Here’s your week ahead in markets from Kevin Buckland in Tokyo, Ira Iosebashvili in New York, Tommy Wilkes, Julien Ponthus and Dhara Ranasinghe in London.
1/ RUSSIAN PAIN
After a barrage of Western sanctions, Russia’s economy will see a sharp economic contraction and spiking inflation. Debt default risks are on the rise.
Aside from the rouble, which has hit record lows, most Russian markets have been shuttered since the West imposed tougher sanctions after Russia’s invasion of Ukraine.
Foreign investors are scrambling to pull money out of Russia — if they can. They have found their assets frozen as the sanctions, Russian-imposed restrictions and a lack of liquidity make it impossible to exit.
It’s also been tough to work out the full extent of the damage. Asset managers will be hoping for more clarity on just how little their Russian investments are worth, if anything.
Many will also be bracing for Western sanctions to go even further and target Russia’s energy industry. Expect more jaw-dropping moves in the rouble and oil prices if they do.
U.S. dollar vs Russian rouble https://fingfx.thomsonreuters.com/gfx/mkt/jnpwebjnbpw/rouble.PNG
2/ WHEN’S THE PEAK?
Expect data on Thursday to show U.S. inflation surged again in February, confirming what we all know already: the Federal Reserve will likely hike rates in March.
Economists forecast headline inflation at 7.8% year-on-year, surpassing January’s four-decade high 7.5% print.
War in Ukraine has tempered expectations for aggressive Fed rate hikes but a stronger-than-expected inflation print might rekindle chances of a more hawkish stance. That would hurt risk assets, already rattled by Ukraine-linked uncertainty.
The Fed says it’s focused on containing price pressures. Its credibility could be at risk if inflation worsens, eroding household spending power and distorting investment and spending decisions. Friday’s University of Michigan consumer sentiment index could provide a sense of how consumers are faring.
3/ ROCK, HARD PLACE, ECB
Before Russia invaded Ukraine, the European Central Bank’s March 10 meeting was expected to accelerate its exit from ultra-easy policies. Inflation at a record high 5.8%, more than double its 2% target, strengthens that case.
Here’s the problem. The war, by sparking a fresh surge in energy prices, is causing upward pressure on inflation. At the same time it hurts consumption and economic growth.
ECB plans are in turmoil and big decisions on Thursday appear unlikely. President Christine Lagarde may be pressed on whether she expects a rate rise, having last month walked back on a pledge not to lift rates this year.
That was before war broke out in Europe, leaving the ECB between a rock and hard place.
Money markets scale back ECB rate hike bets https://graphics.reuters.com/EUROPE-MARKETS/gdpzybkonvw/chart.png
4/ TRIPLE WHAMMY
The Russian invasion is a triple whammy for euro zone banks, with no immediate fix on the horizon. Western sanctions on Russia hit banks exposed to that country’s companies or hold assets there. It begs the question of whether multinational groups such as Austria’s Raiffeisen or France’s SocGen will divest, or be stripped of their units in the country, and at what cost? Second, ECB rate-hike expectations — which banks were benefiting from — have been revised down sharply. Finally, banking shares are cyclical stocks that investors tend to dump first when the macroeconomic environment sours.
The sector has lost over a quarter of its market value in about three weeks. Even if the coming week brings stability, that is a bitter pill for investors who had bought into what was the consensual buy trade entering 2022.
5/ IT’S THE ECONOMY, COMRADE And in China, it’s the National People’s Congress that hogs the headlines.
The annual session of China’s rubber-stamp parliament runs from Saturday for about a week, setting the main economic and policy goals for the year. The key word is stability. On Saturday, China said it would target slower economic growth of around 5.5% this year.
Beijing is keen to put its slowing economy back on track heading into an even more important event later this year — the twice-a-decade Party Congress at which President Xi Jinping is almost certain to secure an unprecedented third term as leader. That means stepped-up fiscal stimulus, increased tax cuts and continued easy monetary policy, while any plans for painful reforms – such as a long-awaited “prosperity tax” – put on the back burner.
Don’t expect any comment on Ukraine either: China has not condemned Russia’s attack and says Western sanctions on Russia are unfair.
China goes for growth https://fingfx.thomsonreuters.com/gfx/mkt/xmvjoebqlpr/Pasted%20image%201646293762459.png
(Compiled by Dhara Ranasinghe; Editing by Christian Schmollinger and Toby Chopra)