Global risk sentiment was severely impaired to start the new week, as concerns over a prospective Russian invasion of Ukraine hijacked headlines and kneecapped equities.
The BoJ bought 70.1 billion yen of ETFs after the Topix dropped 2% by the morning close. Japanese equities ended sharply lower coming off a three-day weekend.
Part of the move in local shares was a catch up trade after declines on Wall Street late last week but, again, Ukraine headlines had traders on edge.
Monday marked the third time in 2022 that the BoJ bought ETFs (figure above). The last purchases came on January 25.
In Hong Kong, officials are dealing with the worst COVID outbreak since the onset of the pandemic. The city had more than 2,000 new cases on Monday, and in excess of 4,500 “preliminary” cases, a situation that threatens to overrun the healthcare system. Apparently, scores who need to be hospitalized are queued. Late last week, a four-year-old died and a three-year-old was listed in critical condition.
Needless to say, Beijing sees this an opportunity to implement the mainland’s “COVID zero” protocols — and everything that goes along with them. That, in turn, has some worried that virus containment measures will be used as yet another Trojan horse for the Party to tighten its grip on the city.
The Hang Seng fell 1.4% Monday. Mainland shares were lower too. China’s “national team” stepped in last week to support A-shares, which fell into a bear market just prior to the Lunar New Year holiday (figure below).
In South Korea, where the beleaguered Kospi shed 1.6%, the finance ministry indicated it may need to take “steps” to tamp down market volatility in the event the situation in Ukraine gets worse. Any impact on the local economy would be short-lived assuming a quick resolution, but a longer conflict would compel the country to diversify imports in order to ensure adequate supplies of energy and grain, the ministry went on to say.
In Europe, equity losses were quite large and energy prices surged. Benchmark European gas rose double-digits as did German electricity for March. Olaf Scholz, who traveled to Kyiv Monday, reiterated the threat of “tough sanctions” that “we can immediately put into force” should Russia go ahead. The Guardian summed things up:
Scholz and Ukrainian president Volodymyr Zelenskiy are expected to talk about how Germany could help stabilize Ukraine’s economy after fears of an imminent war took a toll on its currency. A moratorium on Ukraine’s eligibility for Nato accession was not on the table for Germany, a German source told Reuters, though Die Welt reported earlier a compromise whereby Russia would be assured that Ukraine would not join Nato “in the next 10 years” had been discussed in Scholz’s circles as a “thought experiment.” Ukraine’s ambassador in London, Vadym Prystaiko, suggested to the BBC earlier that Kyiv “might” consider shelving its Nato plans if “pushed to it.”
European shares were positively aghast. Or, actually, negatively aghast.
The DAX was on track for its second largest single-session decline of 2022 (figure below), while French shares were similarly beset. The broader Stoxx 600 was down nearly 3%. All gauges managed to trim losses, but it was nevertheless a dismal day.
Five-year German yields fell below zero for the first time since February 4, while 10-year bund yields dropped 10bps. In the UK, the 2s5s inverted.
“‘When in doubt, hold on to bunds,’ seems to be on full display, with tensions surrounding Ukraine spurring a tactical long bias,” Bloomberg’s Ven Ram wrote, before noting that “concerns surrounding Ukraine may, ironically, spur energy prices and keep inflation on the boil in the euro zone.”
As noted here over the weekend, it’s all about inflation, disease and war. And not necessarily in that order.
