Russia reacts to limit collapse in RUB

Market movers today

We face another day where all focus is on the Russian invasion of Ukraine, Western sanctions, and not least now that the US and the EU are considering even tougher sanctions on Russia. Also keep an eye on Russian counter-sanctions and comments from Chinese authorities.

While in the background from a market perspective and partly obsolete from a macro viewpoint given Russia's war in Ukraine, PMI releases and German inflation data will attract some attention today.

The 60 second overview

Aggression update. Yesterday's ceasefire talks between Russian and Ukraine expectedly ended without any breakthrough. Neither side have confirmed if/when new talks will take place. Russian President Putin has told his French counterpart Macron that a Ukraine settlement can only be obtained if Kyiv was "neutral, de-nazified and demilitarised".

Russian aggression has continued overnight and US satellite company Maxar report of a 64km long Russian military convey close to Kyiv. The West still rules out sending troops to Ukraine and enforcing a no-fly zone in Ukraine amid continued fear or nuclear escalation from Russia. Meanwhile, more ally weapons are sent to Ukraine and Russia warns of retaliation. In a blow to Russia's navy Turkey's Foreign Minister Cavusoglu says Turkey will live up to the Montreux Convention (allow ships to return to registered base) but will otherwise not allow warships to pass through the Bosphorus and Dardannelles straits. According to United Nations more than 500K people have fled Ukraine.

Russia acts to limit downside pressure on RUB. Yesterday's the Russian central bank (CBR) hiked policy rates from 9.5% to 20%, banned foreigners from selling Russian assets and closed the Moscow Stock Exchange until 5 March. The Russian administration has also put into law that Russian exporters must sell 80% of their foreign currency revenue. Finally, Putin has ordered a ban on Russian citizens to buy FX. The announcements initially cut in half the 40% rise in USD/RUB but later in the session USD/RUB rose again and this morning trades 27% above Friday's close.

Russian assets. While the Russian stock exchange has been closed global exchange-traded funds based on Russian assets posted declines of roughly 25%. Also credit default swaps on 5Y Russian sovereign debt hit the highest level on record which - even under very conservative assumptions - translate to at least a higher than 50% probability of default. Likely much higher. Several large foreign investors have announced immediate divestment plans.

Japan joins freeze of CBR assets. Bank of Japan has announced that it will follow Western sanctions on CBRs international reserves. According to the latest data on the currency placements (8 month old) that now freezes at least half of CBRs FX reserves. Also another 22pp is being held in physical gold in Russia making it difficult to effectively use for FX intervention.

Switzerland. Yesterday, Switzerland announced that it will adopt all the sanctions that the EU has imposed on Russian individuals and companies and freeze their assets to penalize Russia for the invasion of Ukraine. This comes as a sharp deviation from the country's deeply rooted tradition of neutrality. Swiss sanctions were followed closely as roughly 80% of Russia's commodities trade goes through Switzerland and Russian deposits in Swiss financial institutions totalled the equivalent of nearly USD11bn in Q3 2021. Also Swiss airspace will no longer allow Russian planes, including the ones transporting Russian oligarchs. For more details,

Energy prices. A surprisingly calm day for the oil and gas market and rest of commodities yesterday as widespread stress in global financial markets were largely absent and energy looks to be bypassed in recent round of sanctions. That may not last as calls continue for a ban on oil imports from Russia continues. OPEC+ meets tomorrow and the cartel looks to stick to its plan of raising output another 400kb/d.

International sports: The International Olympic Committee has urged all governing bodies of international sports to not allow Russia and Belarus to participate in sporting events. Several have followed the recommendation, and perhaps most prominently the international and European football associations, FIFA and UEFA, have announced the immediate suspension of all Russian international and club teams from international competitions. Both UEFA and the German football club Schalke 04 have ended their partnerships with Gazprom.

Eurozone inflation: The Ukraine conflict is not only creating upward pressure on euro area energy prices, but also food and core inflation items. We see upside risks to our base line HICP inflation forecast of 4.7% of ca. 0.5pp in 2022 in light of the latest developments. However, should oil and gas prices stay at elevated levels throughout the rest of the year, inflation rates well in excess of 6% could be on the cards for H2 22. We see downside risks to our 2022 euro area GDP forecast of 4.0% of 0.4-0.5pp, mainly through the adverse hit to consumers from continued high inflation.

What to follow from here: Naturally the ongoing fighting should be followed closely although one should be aware of low intraday transparency, rumours and propaganda from both sides. Details on the implementation of sanction and counter-sanctions should also be followed closely as well as whether China will condemn Russia's aggression. We will also follow developments in Russia closely including the risk of bank run and demonstrations.

RBA: The Reserve Bank of Australia (RBA) left monetary policy unchanged at its meeting overnight, as expected. Australian economy remains fairly well isolated from negative growth effects from the Ukrainian war, and the risks are mostly inflationary in nature. Despite this, RBA maintained its fairly dovish outlook on rates, as wage inflation remains modest (2.3% y/y in Q4), and it is still expected pick up only gradually in 2022. AUD/USD was little affected and the Ukrainian situation's impact on broad commodity sentiment remains by far the most important near-term driver for the cross.

Equities: Equities in a bit of roller-coaster ride yesterday. However, most indices closing well off day lows with tech heavy US Nasdaq index even closing higher. Sectors in a mixed setting with financials and banks loosing after the move to take Russian banks out of the SWIFT system. Green stocks leading the advances not least in Europe with some spectacular gains in stocks such as Vestas, NEL and Orsted. In US Dow -0.5%, S&P 500 -0,3%, Nasdaq +0.4% and Russell 2000 +0.4%. Asian stocks are higher this morning led by Japan while Hong Kong being the exemption moving lower. Futures in Europe are somewhat lower while US futures are flat this morning.

FI: Global bond yields decline and the curves steepen as investors rush into safe-haven assets as more and more sanctions hit the Russian economy. Yesterday, the Russian central bank raised the policy rate to 20% from 9.5% in order to stem the slide of the Ruble. However, the CDS on Russia has now risen to almost 1800bp and the cash bonds are trading at a significant discount.

FX. Relatively quiet in FX space overnight but we expect volatility to stay elevated near-term, as war and sanctions are difficult to predict. USD/RUB continues to trade around 104.5 after the sharp move higher yesterday, as RUB took a big hit from tough Western sanctions. EUR/USD fell sharply in early trading yesterday but recovered during the day and is now trading around 1.12. Both EUR/SEK and EUR/NOK moved lower during the day and are now trading at 10.61 and 9.87, respectively. EUR/CHF moved below 1.03.

Credit. The tough sanctions on Russia introduced over the weekend filtered through to a bearish risk sentiment yesterday. This also meant that the primary market remains very subdued. Yesterday Itraxx main widened 3bsp to 71bp while xover widened 13bp to 345bp. Liquidity in the secondary cash market remains very poor with large bid-offer spreads and mid-levels indicated wider.

Scandi markets

While definitely in the background from a market perspective and partly obsolete from a macro viewpoint given Russia's war in Ukraine, Swedish February PMIs will be scrutinized for signs of easing industrial price pressures as already seen in US and German manufacturing PMIs. There is some, still preliminary, signals from global port statistics suggesting container traffic is gaining pace, lessening supply disruptions.