Slow start for European equities

After a strong week for global stock markets, there’s a tepid start to trade early on Monday. Russia’s invasion of Ukraine is starting to become background music. Higher oil prices are again weighing on the market mood. China’s Covid cases are also a consideration. 

It’s a flat open for all the major European bourses. Real estate, travel & leisure and tech are at the bottom, whilst oil & gas, insurance, banks and autos are leading. Oil is firmer with Brent at $112, WTI at $107, helping push the FTSE 100 higher by around a quarter of a percent. US 10yr yields are a little shy of 2.2%. 

Inflation…German producer price inflation soared to 25.9% in February, accelerating from 25.0% in January and by 24.2% in December 2021. The recent price development in the context of Russia’s attack on Ukraine are not yet included in the results. Not a lot on the calendar today but Fed chair Jay Powell is due to speak about the economic outlook at the National Association for Business Economics Annual Economic Policy Conference. Energy prices were up 68.0% compared to February 2021, prices of intermediate goods increased by 21.0%, metallic steel and ferro-alloys increased by 49.2%. Especially high inflation was recorded in fertilisers and nitrogen compounds (+71.7%), of wooden containers (+62.2%) and secondary raw materials of paper and paperboard (55.8%). Prices of non-durable consumer goods increased by 7.5%, mainly due to higher dairy prices. Especially high inflation recorded for butter (+64.6%) and crude vegetable oils (+50.1%). Capital goods prices rose by 5.5%, the highest year-on-year change since October 1982…All this before the Russian invasion of Ukraine… 

Meanwhile, Russia avoided a bond default last week. Russia’s Finance Ministry said the London branch of paying agent Citi had received $117 million in total payments. But this is set to be tested in the coming weeks. It’s an interesting one, once again counterparties are being rescued (LME and nickel), which is against the whole idea of both the market and the sanctions. (and yes, nickel was straight to limit down again this morning, -15%).

Last week saw Ukraine headlines drive price action and unless there is meaningful progress towards peace it’s likely that markets will remain sensitive to news. Oil prices stabilised throughout last week, and other commodities have been less volatile, though prices remain elevated. Peace talks are stalled.

Euro area PMI surveys will be pored over for the impact Russia’s invasion of Ukraine has had on consumer and business sentiment, inflation expectations and economic activity. Whilst there had been some signs of improvement in some of the survey data, the war will undoubtedly see confidence deteriorate and there could be some big numbers to the downside. PMIs are diffusion indices that measure whether participants think things are better or worse than the month before – they will plunge.  

Following last week’s Bank of England decision on rates, it’s the turn of fiscal policy with the UK Spring Statement on Wednesday. It’s unclear what goodies the Chancellor has up his sleeve, but gilt market and sterling will be sensitive to the announcement. Ahead of the statement is the UK CPI inflation report for the month of February, which is set to rise further from the +5.5% level hit in January.