Live updates: follow the latest news on Russia-Ukraine
It has been another wild start to the trading month, with markets digesting developments from the continuing Russia-Ukraine conflict, news of another Covid-19 lockdown in Shenzhen, China, and looming central bank policy meetings in the US, the UK and Japan.
Markets will be focused on the US Federal Open Market Committee's rate decision, which is due out on Wednesday at 10pm UAE time.
While Federal Reserve chairman Jerome Powell has already committed to raising rates at the committee's March meeting by no more than 0.25 per cent and markets are prepared for the news, what will be interesting is its forecast on future interest rate projections, growth and the US economy in general.
The central bank finds itself between a rock and a hard place — last week’s Consumer Price Index, a key metric that gauges inflation, came in at 7.9 per cent a year, which makes news of policy tightening even more important.
US consumer confidence data also came in much weaker than expected last Friday and overall growth in the US seems to be waning. Therefore, will the Fed continue on its rate-hike path to tackle record inflation while stalling future growth?
The answer to this questions will be clearer on Wednesday.
US equities continue to remain volatile with a bearish bias. The S&P 500 closed near its lowest level since last June, while the Dow Jones is at its weakest level in a year.
Weakness in the Nasdaq continues to be more pronounced and is down more than 19 per cent since its November records. It is worth noting that the index is approaching official correction territory, which is a sell-off of more than 20 per cent.
Technically, we have witnessed a death cross — a pattern that appears when an asset's short-term moving average crosses below its longer-term moving average, which indicates a larger scale sell-off — in both the Dow Jones and Nasdaq indexes, with the 50-day moving average falling below the 200-day moving average.
While we have yet to see this phenomena occur in the S&P 500, the divergence is getting closer and a breakthrough could signal more weakness going forward.
Any signs of concrete progress in settlement talks between Russia and Ukraine will spark a shorter-term rally in equity markets. However, I am not so optimistic about the long-term picture.
As already mentioned, the Fed is fighting higher inflation and slowing growth, and the evolving stagflation environment will put pressure on markets in the medium to longer term.
Add to this the potential longer-term relationship damage between East and West because of Russia's military offensive in Ukraine, which could lead to investor sentiment and confidence being further eroded.
I expect the US dollar to reign supreme amid these developments. The US Dollar Index, a measure of the value of the greenback against a weighted basket of major currencies, finds itself trading at highs last seen in May 2020 and has closed seven out of the past eight weeks higher.
The dollar's bullish momentum should continue. Technically, the 99.50 level remains a key resistance for the index, a break of which could expose 103 levels in the long run, while support looks good to hold at 97.50 in the interim.
Keep an eye out for US Treasury yields, which I expect to continue to strengthen amid the hawkish guidance set by the Fed. The yield curve continues to flatten; we had 10-year Treasury yields closing slightly below the key psychological level of 2 per cent last week.
Meanwhile, the Bank of England is set to announce its interest rate policy decision on Thursday, followed by the Bank of Japan on Friday.
While I do not expect any surprises from the BoJ, which is expected to keep rates on hold, I expect the BoE to follow the US Federal Open Market Committee and increase UK rates by 0.25 per cent.
While weakness is expected to continue in the pound, a more hawkish tone from the BoE could spark a shorter-term bull rally. However, any statement lacking hawkish guidance could result in the pound sliding towards 1.27 levels in the medium term.
News this week that China enforced a total lockdown in the busy port city of Shenzhen, a special economic zone, has also hit risk markets.
With a population of more than 17 million, Shenzhen's lockdown is a reminder that we are not completely clear of the Covid theme yet. Oil sold off on the news, with Chinese demand being affected because of the lockdown.
Finally, price action in gold has been wild, with the precious metal performing as one would expect amid talk of war and heightened inflationary tensions.
However, after hitting a high of $2,070 last week, the pull back since then has been alarming.
If Ukraine and Russia appear to make fundamental progress in negotiations, this could spark a sell-off in gold to levels below $1,900 in the short term.
With so many key themes driving markets, expect volatility to remain elevated in the months ahead. For investors, a prudent investment strategy could be to simply sit on the sidelines for the time being.
Gaurav Kashyap is head of futures at EGM Futures. The views and opinions expressed in this article are those of the author and do not reflect the views of EGM Futures