A Big Step in the Right Direction

Risk appetite is improving much on Tuesday after reports that Russia is withdrawing some troops, a significant decline that makes the prospect of an invasion much less likely this week.

The Kremlin claims that it never intended to invade Ukraine and that the return of some troops to their regular bases after military exercises is taking place as planned. While risks remain high, this looks like a big step in the right direction, and investors, like everyone else, are breathing a huge moan.

European stocks are up more than 1% and US futures are looking at a similar opening, while oil and gold are declining gains from the last two sessions. The mood will no doubt continue to rise if troops continue to return to bases and leaders stop talking about the prospect of an imminent invasion, which seems to have brought fun to some in recent days.

With diplomatic efforts continuing, starting with today’s visit by German Chancellor Olaf Scholz to the Kremlin, we could see that sentiment continues to improve in the coming days. This could allow stocks to make up for lost ground as Ukrainian developments have compounded fears around inflation and interest rates.

Pressure rising on ECB and BoE

Data from across Europe this morning showed that the labor market remained healthy in the new year despite the omicron failure. The eurozone saw employment exceed its pre-pandemic level as the economy grew by 0.3% in the final three months of the year. The resilience shown through the latest wave highlights how tight the labor market is and will continue to accumulate pressure on the ECB as it deals with unusually high inflation.

The Bank of England is too aware of these pressures, has already raised interest rates at each of the last two meetings and is expected to repeat in the coming months. Wages continue to rise as the Christmas bonus appeared to exceed expectations, which contributed to revenue rising 4.3% in the three months to December, a faster pace than a month earlier and much higher than the 3.8% consensus. Pressure is not easing on central banks, although inflation is expected to peak over the next two months.

$ 100 oil has been delayed as Ukrainian tensions ease

Oil prices have retreated from yesterday’s highs and are down more than 3% on the day as fears of invasion recede. Brent and WTI marched to $ 100, but the removal of troops reduced the likelihood of conflict and, in turn, the risk premium. We could quickly see that change over the next few days if the situation worsens but if not, we could see a further decline in the price.

There has been a lot of talk about three-digit crude oil and the threat of war in Ukraine has clearly accelerated that. We could still see oil hit $ 100 even without an invasion, but it will take a little longer. The market is still extremely tight, which is why we see the prospect of invasion raising prices so much. In the absence of any unilateral action by Saudi Arabia, or a nuclear deal between the United States and Iran, it may not be too far off.

Gold appeal is declining due to de-escalation of Ukraine

Growing demand for gold has cooled in recent days after Russia confirmed the planned withdrawal of some troops; the first sign of de-escalation on the Ukrainian border amid warnings of invasion. The yellow metal was bolstered by a combination of its safe haven reputation and its inflationary hedge qualities as oil and gas prices plummeted.

It peaked earlier today at around $ 1,880 but is now testing at $ 1,850, a level that before the invasion warnings on Friday was a remarkable level of resistance. If gold were to remove its invading premium, we could see it return to $ 1,830 where it stabilized around the middle of last week.

Bitcoin is looking to build on positive momentum

Bitcoin has remained fairly stable during the uncertainty of recent days. It has already started to pull back from $ 45,500 as profit has picked up, but the downside since Friday has been fairly mild by its own standards. It certainly benefits from an improved sentiment today though, gaining almost 5% and suddenly last week’s highs look pretty vulnerable. A break up here would put it back into healthy territory and we could see it gaining momentum from there.