European markets are closing in on bear market territory in heavy selling at the end of the week as investors grow increasingly fearful of recessionary and escalation risks.
The sell-off has gathered pace as the morning has progressed and I can’t expect the mood will improve as we head into another highly uncertain weekend. The fact that Vladimir Putin is showing no desire to de-escalate despite crippling economic sanctions says everything about his mentality and that is bad news for everyone.
Europe is coming under considerable pressure as investors fret about the bloc’s exposure to the conflict and the risk that it may be dragged into recession. Sanctions were never going to come without an element of self-harm and we’re seeing evidence of that this week. With Putin clearly undeterred, further measures will be demanded which will come at a further cost.
The day started on the backfoot following reports of a fire breaking out at the Zaporizhzhia plant in southeastern Ukraine, Europe’s largest, following Russian shelling. Reports that followed confirmed that it was now under control and radiation levels hadn’t increased which should have calmed nerves but it’s done nothing of the sort.
It obviously doesn’t help that we’re heading into the weekend, during which a lot can happen before the open next week. But such reckless attacks on a nuclear plant compounds fears about just how far Putin is prepared to go in Ukraine. There is a real fear that the worst is yet to come which is obviously deeply worrying.
A Fed-friendly jobs report
The Federal Reserve will be quite happy with the latest jobs report as they prepare to start aggressively raising interest rates. The US created 678,000 jobs last month which far exceeded expectations, not to mention Wednesday’s ADP number which has never been reliable. What’s more, the unemployment rate fell to 3.8% while participation rose to 62.3%, beating expectations of a drop to 62% and the highest since the pandemic began. Wages were strong again but shy of expectations at 5.1% annually and 0% compared with January. The Fed couldn’t have realistically asked for more.
The dollar softened a little after the report but remained much higher on the day, while US futures pared losses. It’s a strong report but does little to shift interest rate expectations ahead of the meeting in a couple of weeks. The next three meetings will probably deliver 75 basis points of hikes, after which the picture should be much clearer.
Oil climbing again after another volatile session
Oil prices remain extremely volatile given the backdrop of huge uncertainty around Russian exports as a result of Western sanctions. Brent came within a whisker of $120 on Thursday before falling more than 8%. And that was just within European trading hours. It’s trading higher again today, up around 3% and it’s hard to imagine that it’s peaked. We could well be heading for recessionary oil prices.
We keep hearing that a nuclear deal between the US and Iran is close but another day passes without an agreement. A deal would bring around 1.3 million barrels per day back to the market quickly, which would go some way to alleviating the imbalance. Unless of course, Russia weaponizes oil exports in response to Western sanctions, something that still looks unlikely at this stage. It could soften the blow of unintentional disruptions though and perhaps take some of the heat out of the market.
Gold remains in demand
Gold saw some profit-taking around $1,950 again ahead of the payrolls report but it’s clear that there’s plenty of support for the yellow metal. Uncertainty, recession-fears, and high inflation tick all the boxes as far as gold is concerned and there’s little to suggest any of those things are going to improve in the near term.
The dollar pared gains on the back of the jobs report which gave gold a bit of a boost. It remains a little short of $1,950 but there’s no shortage of momentum. Gold is the ultimate safe haven and there’s plenty of demand for those at the minute.
Bitcoin less aligned with risk-assets
Bitcoin has continued to pare gains at the end of the week but it looks in a very healthy position. We saw strong moves earlier in the week on the belief that the crisis in Ukraine and Russian sanctions will lead to increased use of cryptos. While it once again saw resistance at $45,500, that narrative should continue to support bitcoin and see it become less tied to other high-risk assets, alone. It will be interesting to see how it trades around $40,000 as a rotation off here could see it propel higher.
