Overnight Headlines

*Asian shares dip, gold climbs as Ukraine talks make little progress

*Russia warns of $300 oil, cut to EU gas supplies

*UK faces biggest income squeeze since 1970s on Ukraine

*Euro stalls at lows while crisis weighs on growth

US equities dropped on Monday following four straight weeks of declines. Wall Street slid deeper into the red as the session dragged on with indices down between 2.4% and 3.6%. Defensives hugely outperformed. Energy and utilities gained 1.5%, while growth cyclicals were off 4%. The VIX closed at its highest level of the year at 36.5. Futures are all in negative territory.

USD hit another new high at 99.41, climbing against most of the majors. EUR fell to 1.0805 and into March/April 2020 support. GBP dropped below December support and is trading at its lows this morning around 1.31. AUD had its first losing day in four days having spiked to 0.7441 on yesterday’s commodity surge. NZD topped at 0.6925 and the 200-day SMA before pulling back.

Market Thoughts – Hugely volatile energy markets, danger signs in bond markets

A melt-up in oil and commodity prices continues to grab the headlines. Concerns around the parabolic price rises stemming from the Ukraine conflict slowing the global economy are increasing. All eyes are on the US, its allies and the possible ban on Russian oil. This issue is splintering the West as Germany are against a ban, calling Russian oil “essential”. It seems that plans to diversify away from Russian dependence will take months, if not years.

Inflation expectations are going through the roof. Widely watched measures, like the German 2-year and 10-year break-evens, hit new record highs. Yesterday’s huge jump pushed real rates, those adjusted for inflation, deeper into negative territory. This is boosting the appeal of gold which is trading at $2015 this morning.

But in another bearish sign for the economy, the spread between 2-year and 10-year Treasuries briefly dropped below 20bps, a level not seen since March 2020. This all potentially points to stagflation – high inflation and weak growth – for sure in Europe.

Chart of the Day – S&P500 closes below support

Equity markets had a rollercoaster session to kick off the week, pushed around by the volatility in energy and commodities. The main broad European Stoxx600 started the session roughly 4% lower before closing down 1.1%. The S&P500 similarly tried to steady itself before drifting lower through the session. It closed on its lows as tighter financial conditions continue to put downward pressure on equities.

That close is important as it took the index below the January low at 4222. The year-to-date bottom sits at 4114, the level hit when Russia started its offensive. This is now major support. Yesterday’s break down came after prices were trying to stabilise between two Fib levels. The 23.6% mark at 4281 now acts as resistance.