Safe-haven currencies and gold benefit from bad news
We noted earlier in the market brief that headline news from the East Ukraine region would dominate trading for the day. Kremlin Press Secretary Dmitry Peskov reacted to U.S. President Joe Biden's claim that there is a "high" possibility of a Russian invasion of Ukraine "in the next several days," by saying that these kinds of statements only "threaten to escalate tensions" at the present time.
Market Wrap
There have been several reports of live firing in the contested areas of Ukraine from both sides, with the latest reports suggesting journalists in Stanitsya Luhanska are able to hear the sounds of artillery. Regarding frequent US and NATO predictions of the exact date of the Russian invasion, Peskov noted that it is difficult to take such claims seriously and jokingly advised the Ukrainian side to "set an alarm" to be sure there is no "attack".
Thankfully the Russian Defence Ministry said that some Russian troops had now returned to base in Chechnya having completed drills in Crimea. If there is to be a peaceful resolution, both sides would need to retreat a lot more. The expulsion of diplomats from both sides of the story is not helping.
The moves in the markets have been towards the safe-haven currencies, out of the Canadian dollar and euro. Gold has also been bid all day and is pushing into $1900 /oz.
If gold gets through the psychological big figure of $1900 the previously contested level of $1905 is likely to break. This leaves $1934 as a level some weak handed bulls will take profits and possibly flip short.
The US economic data out this afternoon didn't help the risk markets and in particular the US indices. According to the US Department of Labour’s report, initial claims for unemployment benefits increased by 23,000 to 248,000 during the week ending February 12. Analysts had predicted 219,000 initial claims and the rise this week breaks the 3 consecutive declines. The 4-week moving average decreased by 10,500 over the previous week.
The US Census Bureau and Department of Housing and Urban Development announced that housing starts fell 4.1% to 1,638,000 in January compared to the previous month's revised estimate. From January 2021 to January 2022, housing starts rose by 0.8%. Meanwhile, building permits were up by 0.7% on a monthly basis to a seasonally adjusted annual rate of 1,899,000.
James Bullard, president of the Federal Reserve Bank of St. Louis, said on Thursday that he does not believe increased interest rates will cause a recession. Furthermore, he repeated that the central bank should look to raise interest rates by a full percentage point in total by the beginning of July as inflation is over 300 basis points from its target.
The market is signalling that they are preparing for the rate hikes, as the Eurodollar yield curve is rising at the front end of the curve. In a healthy economic expansion, rising yields would be a good sign and the curve would rise from the lower-left corner to the upper right corner. What we have seen since December 2021 in Blue, is that the market expects rates to rise from March and through 2022. But then there is going to be a disruption, as we get through to 2023-2025, which is when the curve bumps and then declines. The extended outlook pricing in a flat to a declining economy. This doesn’t read well, and the Eurodollar market is giving a different assessment than Bullard.
The GBPUSD trade to the upside is working well now and we could be about to push at an accelerated pace towards the 1.3700 level, assuming we can clear some old daily highs. The price compression under the daily 200 EMA could be over on a close as strong as today, which means the uptrend could now be about to move up a time frame with weekly targets all the way back to 1.4200.