Asian share markets slid and oil surged on Monday amid warnings Russia was set to invade Ukraine, risking sanctions that could trigger a further spike in energy costs and stoke global inflation.
Russia upped the ante in the high-stakes diplomatic game by extending military drills in Belarus, while satellite imagery from Maxar showed multiple new field deployments of armour and troops near the border with Ukraine.
An adviser to French President Emmanuel Macron said France and Russia had agreed that a meeting of the Organization for Security and Co-operation in Europe should be called for Monday.
Oil prices climbed almost 2% in early action and Treasury futures firmed. S&P 500 futures fell 0.6% and Nasdaq futures drifted 1.2%. U.S. markets are on holiday on Monday but futures still traded.
MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.4%, while Japan’s Nikkei lost 1.9%.
The latest survey of global fund managers from BofA confirmed the bearish turn as holdings of cash rose to the highest since mid-2020. Funds had the largest overweight share in energy in a decade, and were the most underweight in tech in 15 years.
Also troubling markets has been the prospect of an aggressive tightening by the U.S. Federal Reserve as inflation runs rampant. The Fed’s favoured measure of core inflation is due out later this week and is forecast to show an annual rise of 5.1% – the fastest pace since the early 1980s.
“January inflation readings have surprised materially to the upside,” noted JPMorgan chief economist Bruce Kasman.
“We now look for the Fed to hike 25bp (basis points) at each of the next nine meetings, with the policy rate approaching a neutral stance by early next year.”
At least six Fed officials are set to speak this week and markets will be hyper-sensitive to their views on a possible hike of 50 basis points in March.
Recent commentary has leant against such a drastic step and futures have scaled back the chance of a half-point rise to around 20% from well above 50% a week ago.
That helped short-term Treasuries pare a little of their losses last week, while the whole curve bull flattened as safe-haven buying pulled 10-year yields down to 1.92%.
Currency markets have been relatively calm with the U.S. dollar index just a fraction firmer last week and last trading at 96.100, well short of its recent 97.441 peak.
The euro was holding on at $ 1.1317 but is clearly vulnerable should Russia actually start a ground war in Europe. The dollar has had less luck versus the Japanese yen, which has safe-haven status of its own, and was last stuck at 114.91 and threatening support at 114.78.
Gold has benefited from its status as one of the oldest of safe harbours, climbing to nine-month highs, and was last at $ 1,903 an ounce.
Monday’s rise in oil prices came after they suffered their first weekly loss in two months last week amid tentative signs of progress on an Iran deal which could release new supply into the market.
An accord still looks distant, however, and is offset by the risk of sanctions against major oil producer Russia.
Ministers from Arab oil-producing countries on Sunday rejected calls to pump more and said OPEC+ – the alliance of OPEC countries and other suppliers including Russia – should stick to its current agreement to add 400,000 barrels of oil per day.
Brent rose $ 1.22 to $ 94.76 a barrel, while U.S. crude climbed $ 1.76 to $ 92.83.
