Reuters :
Oil prices sped higher on Thursday as the war in Ukraine drove a mad dash for resources in an ominous sign for global inflation, while Asian shares eked out gains after reassuring comments from the Federal Reserve helped Wall Street bounce.
Brent crude topped $117 per barrel and is now up almost 20 per cent on the week, while everything from coal to natural gas and aluminium are on fire as Western nations tighten sanctions on Russia.
“Russia supplies around 30 per cent of Europe’s gas and oil imports and accounts for around 11 per cent of world oil production,” said Shane Oliver, head of investment strategy at fund manager AMP. “In short, investors are worried about a stagflationary shock.”
The rush to commodities lifted resource-rich Australian stocks (.AXJO) 0.9 per cent, while Indonesia (.JKSE) was just off a record high.
Japan’s Nikkei (.N225) managed a 0.8 per cent gain, while MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) nudged up 0.6 per cent.
MSCI added to Russia’s financial isolation by deciding to exile the country from its emerging markets index, while FTSE Russell said Russia would be removed from all its indices.
Fitch slashed Russia’s sovereign credit rating six notches to “junk” status, saying it was uncertain the country could service its debt, and Moody’s soon followed.
After bouncing overnight, S&P 500 stock futures were flat, while Nasdaq futures eased 0.1 per cent.
EUROSTOXX 50 futures slipped 0.2 per cent, and analysts at JPMorgan had a stark warning for clients.
“We believe investors should underweight the Euro area in both the currency and the equity space given its vulnerability to any further escalation,” they wrote in a note.
“We revised our commodity price forecasts 10-20 per cent higher across the board given the unfolding geopolitical crisis,” they added. “One silver lining is that the crisis forced a dovish reassessment of the Fed by the market, and we continue to assume a ‘moderate’ hiking path.”
EURO UNDER PRESSURE
Fed Chair Jerome Powell on Wednesday said rates would likely be raised by only 25 basis points this month, and the war in Ukraine has made the outlook “highly uncertain”.
Futures reacted by pricing out any chance of a half-point hike later in March.
However, Powell did warn the Fed might have to hike more aggressively if inflation kept rising. That took some of the safe-haven steam out of Treasuries and 10-year yields were back at 1.85 per cent, from Tuesday’s two-month trough of 1.682 per cent.
European bonds also surrendered some of their recent hefty gains after data showed eurozone inflation hit a record high of 5.8 per cent in January, making it harder for the ECB to keep policy super loose.
Inflation was also on the mind of the Bank of Canada when it kicked of a tightening cycle on Wednesday with a quarter-point rate hike to 0.5 per cent.
The move combined with the strength of oil prices to lift the Canadian dollar to a five-week high at $1.2625 . Other commodity-linked currencies also benefited with the Australian dollar at a four-year peak on the euro.
The euro was likewise on the defensive at $1.1098, having carved out a 22-month trough overnight at $1.1056.
