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We expected the central bank community to refrain from rate hikes in the event of Russia invading Ukraine. Yesterday ECB official Holzmann said that the central bank might delay ending their quantitative easing programme from September to the end of the year. At the same time, the sanctions (once again) proved to be much softer than the talk preceding them. This rallied the markets in yesterday’s trading. At the moment it seems that the European leaders are going to prioritise the Russian energy supply over the sanctity of sovereign countries in Europe. Equity markets have, however, created topping formations which together with major war raging in the heart of Europe (for the first time since 1945) means that the risks for equity investors stay highly elevated. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.

It’s worth repeating that the risk of Europe being unstable for the long term remains considerable. According to several commentators including US President Biden, Russia is not only looking to invade Ukraine but has a greater goal in mind. Russia is believed to be re-establishing the former Soviet Union. This would mean more turbulence for all the relevant markets including, stocks, commodities and commodity currencies for months and years to come. 

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DAX 4h chart 02 28

DAX rallied on the news of ECB looking to delay the end of QE. If our assessment of the most likely route forward for the war is correct, Russia will not be stopped (with force) and the western leaders will continue to apply soft measures instead. As the western nations have been made vulnerable by the enthusiasm related to the so-called green transition (a badly managed transition to wind and solar power while the nations are still dependent on oil and gas) Russia can safely assume it can continue taking territory. The western nations will keep on buying Russia’s energy exports. This approach resembles closely the handling of the European banking crisis. The ECB with a blessing from the EU leaders has been kicking the can down the road as it is easier in the short-term. Dax rallied to the 14304 resistance and started to lose momentum around the level. The market has now traded lower and has created another lower high (in 4h chart) near to the upper end of the bear trend channel. Therefore, the downtrend is still intact. This indicates that the risk of DAX moving below yesterday’s low is still considerable. If the market, however, manages to push above the downward sloping channel top the next key resistance area is at 14750 – 14810. The nearest key supports below the current market price is yesterday’s low at 13793.

Gold 1h chart 02 28

Gold lost quite a bit of its shine yesterday after the news about ECB dovishness and the soft sanctions hit the newswires. Yesterday’s range was massive 4.9% and could signal a turn-around in gold. This just underlines the fact that this market is very much news-driven and with the war going on the price moves could be sizeable in the future too. Yesterday was a prime example of what trading is about. It certainly isn’t about always knowing what’s going to happen. It’s about managing the risks and understanding what to do when news change the outlook. Dovish comments from a hawkish ECB official was interpreted by the markets as an indication that the Fed might follow suit and skip the rate hikes. Now gold has traded down to 50% Fibonacci retracement level and bounced higher from it. This level coincides with a rising trendline and could be marking the lower end of the likely range for today’s trading. We have an intraday resistance at 1921.20 under which the market is likely to test this low again. Market breaking above this level would indicate a move to 1935.70 or so.

USOIL1h chart 02 28

USNGAS traded back down to the rising channel low after it was clear that European leaders will keep on buying Russian gas. Markets had priced in a tougher stance from the western countries just like we did in yesterday’s analysis report. Now that the market participants saw that the business as usual will continue when it comes to buying Russian energy exports the price of gas (and oil) dropped substantially. The probabilities for the rally to continue are now much lower and the risk of the market breaking below the rising channel low is much high. Should this happen and now new bullish newsflow comes it’s likely that the market will test the 4.41 support and possibly moves below it to the 4.30 support. Under this scenario, USNGAS stays bearish below 4.70. Above this resistance, the next key resistance is at 4.93.

Macro Drivers for the USD As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.

The Federal ReserveFed could be hiking rates significantly this year and even raise the rates by 50 basis points per FOMC meeting (instead of the normal 0.25%). The Fed believes that rates could rise significantly before hurting employment.
StimulusThe US lawmakers have authorised approximately five trillion dollars of economic stimulus since the beginning of the pandemic. Now, US Congress has passed a $1.2 trillion infrastructure spending plan.
YieldsIn Q3 and Q4 2021, the benchmark 10-year US Treasury yield ranged between 1.1720% and 1.6830%. The hottest inflation readings since 1982 have pushed the 10 yr. yield higher as bonds have been selling off.
EmploymentThe January non-farm payrolls increased by 467K while the analysts had expected only 110K new jobs. Average hourly earnings were confirmed at a much better level than predicted (0.7%, 0.5% expected).
InflationThe annual headline inflation reading for January came in at 7.5% (7% prior). This was the highest CPI print in 40 years. The core CPI (all items less food and energy) was confirmed at 6.0% (5.5% previous).

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 The Next Main Risk Events

  • USD – Core PCE Price Index m/m
  • UD – Core Durable Goods Orders m/m
  • USD – Durable Goods Orders m/m
  • EUR – ECB President Lagarde Speaks
  • USD – Revised UoM Consumer Sentiment

For more information and details see the TIOmarkets economic calendar here

 Market News & Facts 

  • France sends €300 million worth of aid and military equipment to Ukraine
  • US Crude Oil Inventories 4.5M (-1.0M expected)
  • Russia has launched an attack on Ukraine
  • EU unlikely to exclude Russia from SWIFT
  • NZ Official Cash Rate stays at 1%
  • US CB Consumer Confidence 110.5 (109.9 expected)
  • US Flash Manufacturing PMI 57.5 (55.9 expected)
  • US Flash Services PMI 56.7 (52.9 expected)
  • Russian tanks roll into eastern Ukraine 
  • German IFO Business Climate 98.9 (96.4 expected)
  • Putin recognises Donetsk and Luhansk’s independency
  • German Manufacturing PMI 58.5 (59.6 expected)
  • French Flash Services PMI 57.9 (54.0 expected)
  • UK Retail Sales m/m 1.9% (1.1% expected)
  • US Philly Fed Manufacturing Index 16.0 (19.9 expected)

Trade Safe!

Janne Muta
Chief Market Analyst

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