Overnight Headlines

*Fitch, Moody’s downgrade Russia’s sovereign rating to junk

*China’s Feb service activity expands at slowest rate in six months

*Oil jumps, Brent climbs above $118 as supply issues persist

*Euro pinned as war stokes stagflation fears, Aussie up on exports

US equities closed higher as the Dow snapped a two-day losing streak, the S&P500 gained 1.86% and the Nasdaq was up 1.62%. It was the tech-laden index’s fourth positive session in five. The VIX eased but remains above 30. Gains were broad based with energy leading the gains. Asian markets are in the green with European and US futures modestly positive.

USD made a new cycle high at 97.82 before closing near its low. Similarly, EUR hit a new low at 1.1057 but now continues to trade around 1.11. GBP bounced after trading below 1.33 and is consolidating around 1.34. EUR/GBP has broken down today below 0.83. USD/JPY has pushed up to the higher end of its recent range above the November top at 115.52. AUD continues to break higher pushing up to its 200-day SMA at 0.7323.

Market Thoughts – Oil shock continues

Brent prices have shot to their highest in more than nine years, up as much as 4.7% to $118.18. The global benchmark is roughly 50% higher this year. Boycotts of Russian suppliers have also hit natural gas, with European prices up more than 50% compared to a month ago. The ability to access crude from the region because of sanctions is very limited, with the risk of outright supply losses extending for a prolonged period.

OPEC+ yesterday agreed to stick to its plan of increasing output by 400k. Reports suggest the topic of Russia was avoided. Members believe the current price reflects geopolitical risks and not any supply/demand imbalance. But it is becoming clearer that Russian exports of 5 million barrels per day is having a severe impact.

What is also obvious is that the rise in energy costs is spilling over into other commodities like agriculture and metals. For instance, wheat was trading at its highest level since 2008 yesterday. This is an inflationary shock that will erode purchasing power and crimp consumer demand.

Chart of the Day – Gold consolidates above support

There are many potential charts of the day! EUR/CHF is a key gauge of the current crisis with Europe bearing the brunt of the impact from the Ukraine crisis.  Prices broke down to a new cycle low at 1.0159, a level last seen during the 2015 crash. But buyers stepped in (SNB?) to get the pair back above 1.02.

Gold reached its highest close in 13 months earlier this week. The precious metal is now trying to consolidate its gains. Increased haven demand and a sharp reversal in US real (inflation adjusted) yields have helped. Fed Chair Powell did signal a 25bp rate hike in March at his testimony yesterday, with US two-year yields jumping. But any signs of stagflation will also support demand for hard assets such as gold and silver.

There is a band of support at the June 2021 high at $1916. The 61.8% Fib level of the large sell-off wave from the 2020 top to the 2021 lows sits at $1923. Below here is the November peak at $1877 which is also roughly the midpoint of that move. Targets above are the recent spike high at $1974, the next Fib level (78.6%) at $1990 and the 2020 top at $2075.