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Stocks were dumped early on Friday, extending gains from a sharp selloff yesterday afternoon, as Europe woke to the dire situation in Ukraine. Shelling led to a fire at Europe’s largest nuclear facility. The fire is now extinguished, it seems, and the facility in Russian hands. US energy secretary Jennifer Granholm said there were no signs of increased radiation levels and reactors are being shut down safely. Nato meeting today is underway, the alliance reiterating its defensive posture, is not involved in the conflict. Oil prices are well down from yesterday’s high but susceptible to severe dislocation at any point, yields are back up and we may be starting to see signs of that dollar squeeze I’d called for on Sunday with the dollar index breaking above 98 this morning, its highest in almost two years. 

 

BofA says Europe equities suffered their biggest outflows on record in the week to March 2nd as investors rushed for the exits on the Ukraine invasion. They note war is stagflationary, warn of an “inflation shock” and argue investors should be “maximum” defensive.

 

The FTSE 100 fell almost 3% dropping under 7,100 to 7,030, having shed more than 2.5% on Thursday as the fragile support started to unravel. At the lows the index was through the Dec support. I’d noted that stocks had held up ok since Sunday really until yesterday, but a crack of the support here could see retest of Nov lows around 7,000. By send time we are already close to that level so here is the latest. If 7,000 goes the next big support is at 6,800. When the words nuclear in the context of a kinetic war enter the headlines you can rest assured investors will be troubled. But really this is about pent-up downside pressure that had really failed to be let out earlier in the week. No one wants to hold risk this weekend.

Still no bounce for travel stocks: TUI, IAG and Wizz Air all down around 4% this morning, roughly 14-17% lower for the week. Russia-exposed stocks still seeing incredible volatility: Evraz +20%, Polymetal –4%, Petropavlovsk –10%. Shell and BP both down more than 2% as oil prices have retreated. Mondi –6% – has big Russian forest for pulp and paper, Melrose –7%, Rolls-Royce –6%.

Oil prices are technically higher for the session having sharply reversed from yesterday’s multi-year high. Brent came close to $120, trades around $110 this morning. WTI is at $108 after rising above $116 yesterday. I spoke at length about the factors affecting crude prices yesterday; near-term supply fears, self-sanctioning etc. Crude seemed to retreat from its highs as news emerged that Iran is close to signing a nuclear deal that would bring some barrels back to the world market. Wheat is limit up again, trading at its highest 14 years.

US futures are lower following a broad – but more muted than its European peers – sell-off on Thursday. Around half past five in the afternoon the market trade to rally on news the two sides reached an understanding on joint provision of humanitarian corridors for evacuating civilians, and that this agreement involved a possible temporary ceasefire during evacuations. But it was short-lived and simply indicated that a lot of the price action is being driven by machines reading headlines. Nuclear power plant fires have traders on edge and again you always have to ask yourself – who wants to hold risk over the weekend given the uncertainty? Are markets even close to pricing in total collapse of world’s 12th largest economy? Are they close to pricing for gigantic food and energy inflation? Death of the consumer is coming, which might spark the end of inflation cycle – demand shock. But it will be brutal.

Amazon declined almost 3% yesterday…potential play on weak US consumer as inflation surges past 8%. Others might be payment providers, discretionary spend. Bond market is signalling worry with the 2s10s spread down to 28bps, the narrowest in 2 years. Do we see stagflation? If the Fed keeps hiking to counter inflation (surely it must) then it will invert = recession signal. We’re at a point where the only sensible option for the Fed might be to pull a Volcker and engineer a recession. Speaking in Congress this week Powell didn’t suggest he was about to pull his horses. Ugly tape for ARK Innovation ETF, sliding 6% yesterday, Tesla down almost 5% for the session. US jobs report today …but will anyone care when all eyes are on Nato and Ukraine? Eyes will be on wage data – are we in a wage price spiral? (almost certainly we are already).

In FX, the euro is looking dicey. Key test at the last Fib defence line here at 1.10 area. I talked earlier this week about widening basis swaps indicating potential further weakness for the euro. The European Central Bank meets next week…will they throw the euro a bone or signal it will keep APP going for longer due to Ukraine and energy prices? I favour the latter.

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