US EARLY MORNING: Risk-off after Russia shells Ukraine nuclear plant; NFP will likely play second fiddle to geopolitics today

EQUITIES: Equity index futures are lower (ES -0.7%, NQ -0.7%, YM -0.7%, RTY -0.9%), but off lows. The overnight downside came after Russian forces shelled Europe's largest nuclear plant, Zaporizhzhia. The plant has now been seized by Russian military forces; authorities said that the facility is safe and radiation levels are normal. The attack has drawn condemnation from global leaders and there are calls for an emergency UN Security Council Meeting. The upshot for traders is that it will likely be another headline-driven session, which will result in lesser focus on the usually blockbuster US jobs reports (our preview is here). Meanwhile, peace talks yesterday only yielded minimal results; Ukraine said it has a "joint understanding" with Russia on evacuating civilians which could involve a temporary ceasefire. Geopolitical analysts at Stratfor said a diplomatic end to the war remains distant: "As long as both Russia and Ukraine think further developments on the battlefield will work in their favour, they will avoid making diplomatic concessions that the other side, as well as their respective citizenries, could misperceive as weakness or capitulation," it said, "therefore, on-the-ground military realities will dictate the future of the conflict in the coming days and weeks."

TREASURIES: Treasury yields are lower by 3-6bps, rallying most in the belly; the shape of the curve is mixed, but not too far off neutral. While there will be less attention on today’s jobs data, given the seemingly escalating geopolitical tensions relating to Russia, there could still be some repercussions for Fed rate pricing ahead. NOTE: Before the Ukraine crisis, markets had expected the FOMC would lift rates by 50bps at the March 16th confab, and were pencilling in seven 25bps rate rises through the end of this year. Now, however, markets are pricing in a 25bps move in March–which Chair Powell has given a nod to in his Congressional testimonies this week–and are pricing five 25bps rate hikes by the end of this year. We’ll be watching the wages metrics within the jobs report very carefully – the rationale that if we continue to see upside, traders could begin to price a steeper rate trajectory. The February jobs data is the last before the March FOMC; there is also a CPI report next week that will be framed with the same dynamics.

DOLLAR: Geopolitical tensions have seen the Dollar catch a bid, and the Dollar Index is now trading with a 98.00 handle. The AUD and NZD are trading firmer, insulated from the fallout in risk proxies, likely underpinned as commodity prices continue surging, and their geographical distance from events in Europe. Other activity currencies like the SEK, CAD and GBP are softer, the latter despite crude prices again rising. There is not very much green on EMFX screens that we monitor, but we do take note of coordinated FX intervention in the PLN and CZK; their fortunate are currently mixed, with the PLN still softer vs the EUR by around 0.5%, although the CZK is higher vs EUR by around 0.5%. Oil importers are coming under pressure amid further rises in crude prices: the TRY and ZAR have slid by around 1% vs the USD. China’s yuan is once again showing its haven properties, trading a touch higher against the greenback.

COMMODITIES: Major crude benchmarks are between 0.90-1.30 higher, supported by geopolitics. US President Biden is also coming under pressure to ban US imports of Russian oil. While Russian geopolitics is offsetting hopes of an Iran nuclear deal, Thursday afternoon’s price action shows the potential that any constructive updates on Iran can have, particularly in an environment where crude prices have surged higher very quickly, leaving the complex vulnerable to some sharp bouts of profit-taking on hints of Iranian progress. Sides tell us that there are still issues to be ironed out, but the tenor of news flow is suggesting a deal could be just days away. In terms of what this might mean for the supply dynamic, an Iranian official has recently said that if US sanctions are lifted, Iran could boost oil output to 4mln BPD from 2.5mln in about 3 months. Bank of America has suggested that a full return of production estimated at around 3.8mln BPD, of which around 500–800k BPD could return "fairly quickly" (other views here).

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04 Mar 2022 - 10:13- EquitiesGeopolitical- Source: Newswires

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