Daily Wrap Up 22 March 2022

22 Mar 2022 04:28 PM

Absence of EU embargo boosts stocks

The fact the EU have not slapped an embargo on Russian oil has helped stocks. There are reports the group is divided on how to impose further punishment on Russia, and amid the indecision, buyers have stepped into the fold. Sadly, the violence in Ukraine in still ongoing, but sentiment is the markets is improving as the economic war between The West and Russia has not ratcheted up any further, which is why the bulls are out in force. The DAX is up over 0.9% and the CAC is showing a gain of 1.1%, and that is impressive considering the backdrop of war.

Yesterday, Jerome Powell, the head of the Fed, said the central bank might look to hike interest rates by a larger amount as a way of tackling rising inflation. CPI is 7.9%, its highest in 40 years, and core PCE is 5.2%, and both metrics are way above the Fed’s 2% target. In light of yesterday’s comments, traders are taking the view the Fed might look to hike rates by 0.5%. The markets are pricing in a 50-50 chance of a 50-basis point hike in May, and in turn that is putting a floor under the US dollar. The greenback enjoyed a rally yesterday, but it is subdued today.

The risk-off attitude that is circulating in the markets has led to a drop in gold. Demand for the metal is falling as dealers are keen to snap up equities. Gold’s fall is reasonably small, because after all, the dollar hasn’t moved much today.

Brent crude and WTI are down as there are some doubts about the possibility of the EU imposing a ban on Russian oil. In the past 24 hours, it was announced the trading bloc was contemplating an embargo on oil form Russia, but it was reported there is some division amongst members. Oil is down on the day, but it is still above the pre-embargo talk level, so that suggests the market is pricing in some sort of action by the EU, perhaps a pivot to Middle Eastern oil.

CAD/JPY hit a new seven year high as a mixture of a strong “loonie” and a weak yen has elevated the currency pair to new multi-year highs. Canada has a relatively large oil and gas sector, so the Canadian dollar typically gets driven around by the oil market, and seeing as oil is strong in recent weeks, on account of the war in Ukraine, that has helped the “loonie”. By contrast, traders are less fearful about the violence, and in turn the desire to hold lower risk assets such as the yen has fallen.

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