Oil hits $100 again, RBA holds rates steady

European stocks are set for a weaker start, extending yesterday’s selloff, although the mood appears to be calmer than yesterday. 

• Risk sentiment drives markets, German inflation & US ISM manufacturing PMI due
• RBA keeps rates unchanged and warns over Ukraine crisis
• Oil prices extend gains as tight supply gets tighter, overshadowing reserve release talk

The DAX closed Monday -0.7% lower after recovering from a 2% selloff and is set for a milder -0.15% fall on the open. The FTSE closed just 0.4% lower yesterday at 7450, 100 points above the day’s low and is looking to open -0.2% lower today.

Strong sanctions against Russia have seen markets pricing in big damage to the Russian economy via the Russian ruble plunging another 30% to a record low yesterday. The Russian central bank raised interest rates to 20% from 9.5% in an emergency move to try to end the currency rout.

Peace talks have, so far, failed to bear fruit. However, it is still early days and the fact that more peace talks are planned played a large role in the market reversal yesterday. 

Meanwhile the situation on the ground is unlikely to change for now. Risk sentiment will continue to be the main driver in the markets, with economic data playing second fiddle to eastern European news.

In the European session, German inflation data will be the key release to watch. Expectations are for inflation to tick higher in February to 5.1%, up from 4.9% in January but still down from the 5.7% reached in December. High inflation will keep pressure on the ECB to hike interest rates later this year, particularly as energy prices continue to rise. 

Looking ahead US ISM manufacturing data is expected to show activity rising again to 58 in February as Omicron cases eased.

RBA 

AUD/USD booked solid gains across the previous session and is extending those gains today following the RBA monetary policy meeting. As was widely expected, the Australian central bank opted to keep interests on hold at 0.1%, preferring to remain patient as it assesses the risks that stem from Russia’s invasion into Ukraine and the jump in energy prices. 

The RBA concluded that it is too soon to say that inflation has risen sustainably to within the target 2%-3% level. Meanwhile economists have brought forward RBA rate hike expectations for a fourth consecutive month, with the RBA now expected to lift off on rate hikes in the third quarter of this year. 

AUD/USD has pushed over its 100-day moving average and is looking towards 0.73 and the 2022 high.

Oil

Oil prices rose 4.5% yesterday and are on the rise again today as concerns over supply disruption amid the Russian invasion overshadow chatter of a coordinated release of crude oil reserves to calm the oil markets.

Buyers of Russian oil are starting to encounter problems with payment following Russia’s exclusion from SWIFT and vessel availability as Western sanctions start to bite. The effect is tightening oil supply in an already tight market, which should only mean higher prices. It would take either demand destruction or sustained higher supply to bring oil back markedly below $100, neither of which looks likely in the near term.