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The ASX faces early pressure after Russia’s recognition of two breakaway regions in Ukraine sharpened invasion fears and drove European stocks and US futures sharply lower.
ASX futures sank 70 points or 0.98 per cent as a gauge of global stocks hit a three-week low. Wall Street was closed overnight for Presidents Day.
Oil and gold rallied, along with industrial metals with significant Russian production. Copper declined. Iron ore rose.
World Markets
European stocks and US futures slumped after Moscow doused hopes for a summit between President Vladimir Putin and US President Joe Biden. US futures remained firmly underwater after Moscow this morning recognised two regions in eastern Ukraine held by Russian separatists, a move seen as a possible prelude to an invasion. The White House, European Union and UK announced plans to impose sanctions.
S&P 500 futures dropped 1.25 per cent. Nasdaq futures shed 1.9 per cent and Dow futures 0.9 per cent.
The pan-European benchmark, the Stoxx 600, fell 1.3 per cent. Benchmarks in Germany and France lost more than 2 per cent. Britain’s FTSE 100 index dipped 0.39 per cent. MSCI’s world equity index fell 0.4 per cent.
Putin brushed aside warnings of sanctions if Russia recognised the self-proclaimed Donetsk People’s Republic and Luhansk People’s Republic. The Russian President formally recognised both republics first thing this morning, Australian time.
The White House said it would impose retaliatory measures against “today’s blatant violation of Russia’s international commitments”. Europe indicated it would follow suit. British Foreign Minister Liz Truss said an invasion was highly likely. EU leaders warned recognition of the rebel regions could be a step towards annexation.
“If there is annexation, there will be sanctions, and if there is recognition, I will put the sanctions on the table and the ministers will decide,” EU foreign policy chief Josep Borrell said.
Russia’s benchmark stock index, the MOEX, tumbled 10.5 per cent to its heaviest loss since the invasion of the Crimea in 2014. The rouble dropped 2.84 per cent against the greenback. Russian banks logged double-digit declines on reports possible US sanctions include a ban on US banks processing transactions from Russian counterparts.
Australian stocks rebounded yesterday after the White House announced President Biden had agreed to a summit with Putin. The Kremlin later doused hopes of a diplomatic resolution, indicating there were no concrete plans to meet.
“The Kremlin made clear today that they are in no rush for a summit with Biden,” Tim Ash, strategist at BlueBay Asset Management, told Reuters.
Australian outlook
Hopes for a diplomatic solution to the Russia-Ukraine crisis withered overnight, likely setting up the ASX for a tough session. The S&P/ASX 200 swung yesterday from a loss of 65 points to a gain of 12 points or 0.16 per cent on the prospect of a Biden-Putin summit. Those gains, plus more, appear likely to dissipate this session.
World markets remain highly volatile and headline-driven. As yesterday’s ASX action shows, market direction is being dictated by news wires, rather than fundamentals. That seems likely to continue at least until markets find a level where the economic fallout from the Ukraine crisis is “factored in”.
World markets were already undergoing a period of adjustment to the prospect of a return to more normal rates. In other words, the Ukraine situation has laid volatility upon volatility. The Australian volatility gauge, the S&P/ASX 200 VIX, hit a three-week high yesterday and will likely spike again today.
City Index senior market analyst Matt Simpson described the overnight action as “classic risk-off moves… which saw US futures fall alongside bond yields as investors moved into the safety of bonds, gold and the Swiss franc.
“[US oil] rose on the fumes of war and wasted no time reclaiming the $90 handle. Energy stocks are likely to benefit today in Asia, as will gold miners now gold closed above 1900 for the first time since June. Gold is less than a day’s trade away from the June 2021 high, and Putin seems to be doing all he can to make sure that level is tested – if not broken as soon as possible.”
Interim earnings provided most of yesterday’s big winners and losers. The season continues today with updates from Coles, Cochlear, Seven Group, Costa Group, Estia Health, Alumina, Monadelphous and G8 Education.
Weekly consumer confidence figures are due this morning. RBA Assistant Governor Christopher Kent is scheduled to address an online event hosted by the Australian Financial Markets Association at 12 pm AEDT.
The dollar trimmed yesterday’s rally but remained 0.28 per cent ahead at 71.91 US cents this morning.
Commodities
Oil surged on the prospect of disruption to Russian supplies. Russia is one of the world’s largest producers. Brent crude settled US$1.85 or 2 per cent ahead at US$95.39 a barrel.
Crude prices have been caught in a tug of war between the likely impact of a Russian invasion versus the prospect of Iranian oil returning to market if the US and Iran reach a deal on Iran’s nuclear program.
“If a Russian invasion takes place, as the U.S. and UK have warned in recent days, Brent futures could spike above $100/bbl, even if an Iranian deal is reached,” Commonwealth Bank analyst Vivek Dhar said.
Gold pushed firmly above US$1,900 an ounce as investors turned to safe havens. Metal for April delivery was lately up US$6.70 or 0.35 per cent at US$1,906.50 an ounce in electronic trade.
Aluminium and nickel rose on the London Metal Exchange. Russia is a major producer of both. Benchmark aluminium on the LME firmed 0.55 per cent to US$3,280.60 a tonne. Nickel climbed 0.93 per cent to US$24,495. Tin gained 0.73 per cent. Copper fell 0.81 per cent, lead 1.11 per cent and zinc 0.73 per cent.
Iron ore shrugged off Chinese plans to force producers to sell through a centralised state-backed platform. The move, reported by Bloomberg, would give Beijing greater control over prices. At present, steel mills are free to negotiate their own prices.
The spot price landed at Tianjin climbed US$5.50 or 4.1 per cent to US$139 a tonne. Benchmark iron ore futures on the Dalian Commodity Exchange climbed 4.7 per cent to 707 yuan a tonne. Stainless steel futures edged up 0.4 per cent. Steel rebar gained 2.4 per cent.
BHP‘s UK-traded stock dropped 0.51 per cent. Rio Tinto gained 0.65 per cent.
