Daily Market Commentary 2nd March 2022

War is never good for market sentiment and drives uncertainty, which is the enemy of markets. The war in the Ukraine is going full speed ahead with the Russians surging troops and equipment across the Ukraine to end he war quickly. The threat of the war expanding into greater-Europe remains slight but the impact on European countries will be immense. The sanctions issued against Russia will hurt European countries dramatically, as they are heavily dependent of Russian agriculture and energy. Many European countries were already experiencing an energy crises, but this will add to the economic and social pain, to an all new higher level. Germany particularly, will suffer as they have grown dependent of Russian Oil and Gas, while implementing green energy policies domestically for ideological purposes. These problems will quickly materialise into living costs, inflation and economic performance.

The sanctions on SWIFT and the Russian Central Bank will hit European trade hard and indirectly hurt the SWIFT system as Russia and China look for alternative payment systems. This will also be a challenge to the US Dollar’s reserve status, which would change the economic balance in the world, despite the initial rally in the US Dollar as a move to safety. The EUR collapsed to 1.1100, reflecting the new reality, while the GBP plummeted to 1.3300.

Commodity prices are surging, which is a counter to the surging reserve, allowing the NZD to trade around 0.6750, while the AUD slipped below 0.7240. The RBA left rates unchanged, as expected, citing further uncertainties created surrounding the Ukrainian war. The Governor noted that inflation was under control, but rising faster than expected, while commodity prices supported the economy.

All attention remains on the Ukraine war and the impact it is having, especially surrounding sanctions. Attention will turn to the Fed Chairman Powell and his appearance before Congress. If he blinks on monetary policy and the much vaunted rate rises, signalled for this month, markets could react sharply. He may cite the Ukraine as an area of sufficient uncertainty to defer rate rises, which will surge equities, but only enhance rampant inflation.