Some 75% of the companies in the benchmark MOEX Russia equity index fell to new 52-week lows on Monday, when the gauge plunged almost 11% due the escalating tension between Russia and the West over Ukraine. The last time a comparable proportion of Russian shares fell to such lows was in 2008. Back then, the nation’s markets were roiled by the global financial crisis, sliding oil prices and fear of political risks after Russia’s war with Georgia.
Early signs are good for European energy stocks in 2022. The sector is among the top-performing Stoxx 600 industry subgroups this year, gaining more than 5% as a rallying oil price and easing omicron concerns have provided support. Yet stocks have struggled to keep up with gains in crude prices, a disparity that might be explained by a higher risk premium for European oil majors when it comes to environmental, social and governance issues.
Investors looking to hide in defensive European consumer staples now have to pay a hefty price. The MSCI Europe Consumer Staples Index is near the most expensive in 10 years relative to the broader market, trading at a 45% premium compared with a historical average of 30%. Demand for defensive staple stocks has been strong as inflation soars and growth fears mount, with these companies said to have stronger pricing power than other consumer peers.
Italian equities are still very attractive compared to European peers. Earnings estimates outpace rivals in the Stoxx Europe 600 and the Italian benchmark is trading at a discount of about 27% to the broader European index – near the bottom of a 15-year range. The Italian gauge has rallied about 22% over the past year, compared with 18% for the Stoxx 600 amid a strong earnings recovery from the pandemic, as well as political stability under Prime Minister Mario Draghi.
Cyclical stocks may find some relief in the euro’s recovery as the European Central Bank turns more hawkish and tightens policy. The price of cyclicals relative to the Stoxx 600 Index has been closely following the move in the euro over the past five years, with the group underperforming since the start of 2022 as the single currency hit a 10-year low. The euro is considered as a “risk-on currency,” according to Goldman Sachs Inc. strategists, and its strengthening may benefit domestically-exposed stocks such as banks.
Electricite de France SA plunged by a record on Friday and other European utilities came under pressure as the French government plans to force EDF to sell more power at a steep discount to protect households from surging electricity prices. The decision has turned the utility into “the first victim” of the country’s presidential elections, which takes place in April, according to Francois Breton, a fund manager at Edmond de Rothschild Asset Management. French President Emmanuel Macron, who faces re-election, “is running out of time, he needs the support of households,” Breton said.
The offshore yuan’s funding cost – as measured in the forwards market – slid to the lowest since June 2020 on Tuesday as state-owned banks boosted lending of the currency and traders bet on easier Chinese monetary policy. The cheaper funding costs increase carry for offshore investors buying short-term onshore yuan debt, said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group Ltd. One-year offshore dollar-yuan forward points could drop toward 1,000 pips if the authorities lower the medium-term lending facilities rate, which could happen as soon as next week, he added.
The calm market reaction to the Federal Reserve’s taper announcement could well be the eye of a storm as traders refuse to back down from betting that central bankers are too complacent about the threat of out-of-control inflation. Futures markets continue to price in about a 70% chance the Fed hikes next June, odds that were little changed into and out of this week’s meeting. Demand strengthened for downside eurodollar hedges – a signal investors are eager for protection against more aggressive bets on further rate hikes.
The cost of hedging the euro over the next two weeks is the most expensive this year. That comes as volatility has surged on concerns over the omicron strain, and now the period captures the next policy decisions by the Federal Reserve and the European Central Bank. With central banks expected to continue plans to reduce pandemic-era stimulus, traders are betting on bigger swings.
The yen’s tumble to a two-decade low has flipped the script for currency traders who are now more fearful of further declines than any time since 2015. Options contracts show traders are paying more to protect against US dollar gains versus the yen than to guard against declines. That’s after spending all of the past six years skewed toward hedging against declines in the pair. The yen is a whisker away from sliding to the lowest in about 24 years, depreciating earlier Thursday to 134.56 per dollar, and less than one yen away from its 2002 nadir of 135.15.
Currency traders are bracing for wider swings in Russia’s ruble amid tensions over Ukraine, after the Kremlin said there are “no concrete plans” yet for a summit between Vladimir Putin and Joe Biden. Demand to hedge against tail risks over the next month, as shown by so-called butterfly options, is near the highest since a slump in oil prices hurt the ruble in 2015. “Markets may want to see concrete steps being taken to reach a compromise,” said Piotr Matys, a senior currency strategist at InTouch Capital Markets Ltd. in London.
The winning run in U.S. equities has been unstoppable, but data from the world’s biggest exchange-traded fund is flashing a downturn. Traders pulled $6.6 billion last week from the SPDR S&P 500 ETF Trust, the most since April, according to data compiled by Bloomberg. To be sure, weekly readings can be noisy and flows don’t always move in line with stock prices.
Equity investors flocked to an exchange-traded fund of Russian stocks even as tensions over Ukraine whipsawed global markets. The U.S.-listed VanEck Russia ETF saw a fifth successive week of inflows, taking the total in February to $102 million, and putting it on track for the best monthly showing since 2020. While inflows into ETFs tend to reflect bullish positioning, investors can also use the securities to hedge against price declines.
Japan’s 30-year bond yield has risen to 0.80% this week – the highest since December 2018 – boding well for the government’s sale of this tenor on Thursday. The auction is expected to draw demand given the yield level and a positive outcome could help stem the weakness in longer-dated bonds, said Ataru Okumura, a strategist at SMBC Nikko Securities Inc. in Tokyo. The finance ministry will sell 900 billion yen ($7.9 billion) of the securities with results due at 12:35 p.m.
Japan’s prefecture of Hokkaido joined a growing list of entities to pull planned yen bond sales after a jump in borrowing costs. At least seven borrowers have either canceled or tweaked plans to issue yen bonds since a Bank of Japan policy meeting in late April. Spreads on yen notes spiked to the highest in more than a year last week.
Australia’s bond market faces a challenging week, starting with inflation data Tuesday that’s expected to amplify calls for the central bank to end quantitative easing. Speculation that the Reserve Bank of Australia will call a halt to its near A$330 billion ($237 billion) bond-buying program at its Feb. 1 meeting is helping push up yields that QE was supposed to hold down. Benchmark 10-year yields are back to more than 100 basis points higher than the average for the seven other major markets holding AAA grades from the three main ratings agencies.