Oil price smashed, S&P 500 lowest in a year

Oil prices crash by 9% on EU sanctions U-turn, while negotiations between EU leaders continue. Fed warns over impact of tighter monetary policy, higher inflation and increased geo-political risk on liquidity conditions. Equities markets bounce back as USD pauses ahead of tomorrow’s inflation reading. 

Key Factors for Today

• Oil prices plunge as EU eases sanctions on Russian oil

• Fed warns over deteriorating liquidity environment 

• Equities bounce back a little but DAX remains weak, S&P 500 hit a 1-year low 

• Dollar holding near highs, EUR & JPY Firmer

• Gold & silver rally 

Coming Up

• FOMC’s Waller & Mester speak 

• AUD Westpac consumer sentiment 

• CNY CPI 

Oil Crashes on EU Sanctions U-Turn

The main news as traders hit their desks in Europe on Tuesday is the plunge in oil prices. Crude futures are down almost 9% from yesterday’s opening prices as markets react to news of a shift in EU sanctions on Russian oil. Negotiations between Hungary PM Viktor Orban and EU leaders continue this week regarding proposed EU sanctions on Russian oil. 

The EU is pushing for a full-scale ban on Russian energy imports within the next 6 months. However, given Hungary’s reliance on Russian energy, the country’s leader has so far vetoed any such move. EU leaders have reportedly scaled back their proposals accordingly, EU leaders will no longer push for a ban on EU-owned ships transporting Russian energy products following opposition from other member states, including Greece. 

Fed Warns Over Liquidity Environment 

The Fed’s Semi-Annual Financial Stability Report, released this week, made for bleak reading. In the report, the US central bank warned of heightened risks to liquidity conditions linked to tighter monetary policy, elevated inflation and the ongoing risks stemming from the conflict in Ukraine. Consequently, the report noted that: “While the recent deterioration in liquidity has not been as extreme as in some past episodes, the risk of a sudden significant deterioration appears higher than normal.”

Risk Assets Rebound on Tuesday 

Equities markets have seen better demand today with the Nikkei, the S&P and the FTSE each trading in the green over the European open. The DAX however remains under heavy selling pressure as recent ECB rate hike chatter weighs on sentiment. In terms of factors helping support such a bounce it is likely a combination of short covering as well as growing chatter about plateauing inflation. However, US CPI tomorrow could well undo this theory, sending equities lower still if further gains in inflation are recorded in April. 

EUR Leading the Pack in FX

In FX, USD has had a quieter start to the week with price remaining fairly stagnant on Tuesday. EUR is the strongest in the G10 pack across the end of Asia and into early Europe, while the antipodeans, AUD and NZD, remain under pressure. JPY has seen better strength recent as safe haven flows pick up on falling equities prices. 

Gold & Silver Rally as USD Pauses 

Gold and silver prices are also seeing better demand today. With USD having paused near highs and with oil prices coming off sharply, the metals complex has seen support kicking in near recent lows. However, prices remain subject to further downside on any fresh USD upside.