Overnight Headlines

*US Secretary of State Blinken cancels meeting with Russia’s Lavrov

*RBNZ hikes by 25bps and flags more rate hikes to come

*Fed’s Bostic: Fed is poised to cut economic help swiftly despite tensions

*Oil steadies as traders weigh US sanctions, Iran negotiations

US equities tumbled despite paring losses as market sentiment soured on intensifying geopolitical tensions. The Dow declined 1.4% and dropped for a fourth straight session. The S&P500 fell 1.01% and is down more than 10% from its record close in early January, so officially in a technical correction. Cyclicals underperformed with healthcare faring the best. The VIX ticked higher but remains below 30. US and European futures are in the green.

USD dipped very slightly amid relatively uneventful trading. The DXY traded within a range before closing just above 96 and the 50-day SMA. EUR also trades around the 50-day SMA at 1.1323. GBP consolidated losses after struggling to break higher. BoE hawk Ramsden signalled only modest tightening ahead. USD/JPY dropped below its 50-day SMA before rebounding above 115. NZD is enjoying its seventh straight day of gains, after the promise of more hikes by the RBNZ.

Market Thoughts – Market gyrations amid semi-invasion and sanctions

Whipsaw moves in some markets are commonplace at the moment. Take Russia’s stock market which ended yesterday’s session 1.6% higher, having fallen more than 9% earlier in the day. This marked the most volatile two days of trading for Russian equities since Moscow seized control of Crimea in 2014. The Moex had fallen as much as 14% on Monday. Investors are weighing up the impact of retaliatory western sanctions with Putin’s move into Eastern Ukraine.

If this is the biggest threat to European security since World War two, then oil can shoot way beyond $100 and add another $10 or $20. Natural gas prices too will obviously surge north. Tougher sanctions seem inevitable if the Kremlin embarks on a deeper invasion. That said, risk appetite has steadied this morning with diplomatic channels still hoping to be utilised.

Measures by the West will likely strike a balance between hitting Russia hard, but not so hard as to trigger aggressive Russian counter-measures. There is a big difference between sanctions aimed at financial systems and those that target oil and gas suppliers.

Chart of the Day – NZD/USD boosted by hawkish hike

Amid all the geopolitical tensions, the RBNZ hiked rates as forecast by 25bps to 1%. Importantly, it said the cash rate is expected to peak at a higher rate (3.25%) than assumed in its November statement (2.5%), and higher than many analysts had estimated. The committee also affirmed it was willing to move rates in larger increments if required over the coming quarters. Governor Orr repeated this later, saying rates do need to rise significantly and cannot rule out 50bp hikes.

NZD/USD has been the top performing major over the last week, even though geopolitical issues would ordinarily slow upside in pro-cyclical currencies. Prices bottomed out at 0.6529 in late January and the kiwi has pushed above trendline resistance and the 50-day SMA around 0.6720/26 this week. Upside targets include 0.68 and the 100-day SMA at 0.6854. Support is the December low around 0.67.