February 4, 2022

“The European Central Bank has taken a hawkish turn following rising inflation. ECB President Christine Lagarde has reconsidered earlier comments that a rate hike this year is very unlikely.”

Tim Hallinan – Trading Director

Main Headlines

The US has accused Russia of planning to fabricate a pretext for an invasion of Ukraine, by falsely blaming Ukrainian military for an attack on Russian-backed separatists or Russia itself, US officials say. Senior Biden administration officials revealed the information on Thursday as tensions flared up between Washington and Moscow over Russia’s military build-up in Ukraine. While talks between Moscow and Washington to defuse the stand-off are continuing, Vladimir Putin, Russia’s president, has escalated military preparations for an attack. Joe Biden dispatched 2,000 troops to Europe this week, including new deployments to Romania and Poland on NATO’s eastern flank. Russia denies planning to invade, saying the troops are there for drills. They currently number about 100,000. Senior US administrator officials say that ‘the plan’ could involve staging and filming a faked attack. It would show corpses and destroyed locations, faked Ukrainian military equipment, Turkish-made drones and actors playing Russian-speaking mourners, they said. But the officials stressed that this was only one of the options Russia was considering.

The Bank of England warned that households face the worst squeeze on their disposable incomes for at least 30 years, with inflation rising to 7.5 per cent, economic growth slowing, unemployment rising and taxes going up. The central bank raised its key interest rate to 0.5 per cent on Thursday and trimmed its GDP forecast for 2022 to 3.75 per cent, down from the projected 5.0 per cent. This is despite a relatively rapid recovery from the impact of the Omicron variant of Covid-19. It is worse than the squeeze in 2008 and 2011 in the aftermath of the financial crisis, and only the third time since 1990 in which disposable income has shrunk. In the UK, the squeeze on incomes will hit hardest in April when the typical gas and electricity annual bill rises 54 per cent to almost £2,000 from £1,277 today. Furthermore, Chancellor Rishi Sunak, who announced a £9bn package of support to hold down bills, admitted at a Downing Street press conference that “energy markets are forecasting that prices go up further in October.” The Bank of England’s governor Andrew Bailey said the rate rise “will be felt by households and businesses across the UK”.

GBP

Sterling is weaker than most major currencies in the early morning trade. Boris Johnson is suffering further blows, with a few senior aides quitting and Rishi Sunak implicitly criticizing him. Munira Mirza, Johnson’s policy unit chief and a close ally for almost 15 years, quit, denouncing Johnson’s claim on Monday that Labour leader Sir Keir Starmer had failed to prosecute the late sex offender Jimmy Savile. Rather than defending Johnson, Sunak used a Downing Street press conference to describe Mirza as a “valued colleague” while undermining the prime minister. Meanwhile, Sunak called his £9bn plan to soften the blow of soaring domestic energy prices “fair, targeted and proportionate”, but others called it “woefully inadequate.” Britain’s energy regulator Ofgem on Friday opened a consultation on a proposal to switch from half-yearly to quarterly price cap updates and reducing the advance notice for new tariffs to take effect. British new car registrations rose by more than 25% in January compared with the same month last year when showrooms were closed due to tight coronavirus restrictions.

EUR

Euro is well bid against most major currencies overnight. Europe could soon enter a “long period of tranquillity” that amounts to a “ceasefire” in the pandemic thanks to the less severe Omicron variant, high levels of immunity and the arrival of warmer spring weather, the World Health Organization has said. French President Emmanuel Macron will meet Putin in Moscow on February 7 and the leader of Ukraine on February 8 to discuss the Ukraine situation, as Western world leaders try and avoid a major conflict with Russia over Ukraine. The European Union has prepared a “robust and comprehensive” package of sanctions to unleash on Russia if it continues its aggression towards Ukraine. Meanwhile, Lithuania’s president called for Germany and the US to commit more troops to his Baltic country and send a signal to Moscow over its military build-up in Ukraine and neighbouring Belarus. Italy is simplifying its travel restrictions for EU and UK travellers – fully vaccinated UK travellers arriving in Italy currently need to present their Digital Covid Certificate and a negative Covid test to enter the country.

USD

The dollar is stronger against sterling and weaker against euro this morning. The United States warned Chinese firms on Thursday they would face consequences if they sought to evade any export controls imposed on Moscow in the event of Russia invading Ukraine. US President Joe Biden will sign an executive order on Friday requiring “project labour agreements” in federal construction projects over $35 million, a potential boost to workers and unions that negotiate these deals, and a shift the administration says will speed up building times. The order will apply to $262 billion in federal construction contracting and impact nearly 200,000 workers, the White House said late on Thursday. An arctic storm is bearing down on Texas almost a year after another freeze caused catastrophic blackouts, setting the state’s residents on edge, and posing a major test of reforms to its power grid. Officials said they do not expect this week’s weather to be as severe, and the state’s governor Greg Abbott sought to reassure Texans that the grid had been fortified. The US army reported that US soldiers who refuse to get a Covid-19 vaccine will be immediately discharged, saying the move was critical to maintain combat readiness.

Markets

U.S. equity futures rose Friday as Amazon.com Inc. earnings soothed nerves about the technology sector, while a rally in Hong Kong shares boosted Asia. A hawkish chorus from key central banks hurt bonds. Contracts on the tech-heavy Nasdaq 100 were up about 2% after e-commerce titan Amazon and Snap Inc. soared in late trading on strong earnings. An Asia-Pacific equity gauge pushed higher partly on a 3% jump in Hong Kong, which was catching up with global markets after reopening from a holiday. Amazon may add nearly $200 billion in market value if the stock’s 14% gain in after-hours trading holds to Friday’s Wall Street close. That brightened the mood after a historic, $251 billion wipe-out for Facebook owner Meta Platforms Inc. consigned the Nasdaq 100 to its worst drop since 2020. Hawkish comments from European Central Bank President Christine Lagarde and a Bank of England interest-rate hike underlined risks from inflation. The euro strengthened, and the dollar retreated. Volatility has become the hallmark of global markets this year. Investors are trying to come to grips with less favourable monetary conditions and a moderating global recovery but hoping company earnings will underpin stocks.

Main Economic Data/Central Banks/Government (All Times CET)

8:00 a.m.: Germany Dec. factory orders
8:45 a.m.: France Dec. industrial production
9:00 a.m.: BOE’s Bailey speaks
9:30 a.m.: Germany Jan. construction PMI
10:00 a.m.: ECB survey of professional forecasters
10:30 a.m.: U.K. Jan. construction PMI
11:00 a.m.: Euro area Dec. retail sales
11:30 a.m.: BOE’s Pill speaks
12:00 p.m.: U.K. sells bills
12:30 p.m.: Norway new central bank governor press conference
2:30 p.m.: U.S. Jan. nonfarm payrolls, unemployment rate
5:00 p.m.: ECB’s Villeroy speaks

Corporate Events

Earnings include InterGlobe Aviation, Tata Steel, Mebuki, Ricoh, Sanofi, Regeneron, Bristol-Myers Squibb, Vinci, Eaton, Air Products, Carlsberg, AAK, Spectrum Brands, Aon, Adient

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