Overnight Headlines

*Putin recognises breakaway republics, orders troops into Eastern Ukraine

*Asian markets and equity futures in the red, havens supported

*China boosts cash injections into banking system before month-end

*Gold and oil make new cycle highs on growing fears of conflict

US equities and bond markets were closed yesterday for the President’s Day holiday. Futures for the three main indices are all in the red, with the Nasdaq worst hit, currently opening over 2% lower. All three indices lost more than 1% last week. European bourses are set to open lower after the risk off session on Monday. Growth cyclicals led the losers with healthcare and materials the relative winners.

USD edged slightly higher, after initially falling, as markets remained highly sensitive to Ukraine developments. EUR traded in a volatile manner between 1.1305 and 1.1390 before closing at 1.1310. GBP was largely unchanged, having failed to get above 1.3640 again. USD/CHF was the major mover, plunging below its 200-day SMA to close at 0.9157. AUD and NZD remain resilient, holding onto recent gains.

Market Thoughts – Fog of conflict and war

Geopolitics remains the clear driver for markets after Putin formally recognised the two separatist regions in Eastern Ukraine as independent. The West announced economic sanctions on the regions with further clarity needed on the wider response. The Kremlin’s next steps will be key with the Lavrov-Blinken meeting scheduled for Thursday in focus.

Markets remain surprisingly calm considering military escalation has started, with very sharp moves so far contained to Russian assets. CHF was the chief winner in FX, gold is moving towards $1916 and oil $100. European gas prices have surged 13% this morning as the West readies more sanctions. But markets are far from pricing in a full-blown war.

Chart of the Day – Gold marches above $1900

After an impressive week, gold is making new cycle highs this morning. The safe haven appeal of the precious metal is obvious in times of stress, with momentum and diversification helping. The market is also putting a premium on commodities due to the risk that Russian exports will be hit by sanctions.

The key test for bugs will be the June high at $1916. This forms a band of resistance with the 61.8% Fib level of the large sell-off wave from the 2020 top to the 2021 lows at $1923. Levels above here are $1959/65 and the 2020 top at $2075. Support is $1877.