Cautious optimism for diplomacy lifts stocks

Hopes of a meeting between Russian President Putin and US President Biden are boosting risk sentiment. European and UK PMIs are due.

• Russia, Ukraine headlines continue to drive market sentiment
• Eurozone & UK PMIs are expected to show an improvement
• Risker assets & currencies like the aussie are in favour, whilst safe havens fall.

Asian markets pared losses and European bourses are set to start the week on the front foot on news of a possible summit between Russia’s Putin and US President Biden.

France proposed a summit between the two leaders, which has been accepted in principle, on the condition that Russia doesn’t invade Ukraine. Hopes of a diplomatic solution and a move back from the brink of war is boosting risk sentiment, favouring riskier assets such as stocks, whilst safe havens, such as gold and the Japanese yen are falling out of favour.

Last week Russia/Ukraine headlines saw the markets whipsaw as they jumped from one headline to the next, with fears of an imminent invasion rising and falling daily, or even multiple times within a day. This week looks like it could be setting off in a similar fashion.

It’s worth keeping in mind that today is a US public holiday. US stock markets are closed and liquidity in the broader financial markets is likely to be thinner.

UK PMIs

In the UK, business activity data, as measures by PMIs will be in focus. The UK is expected to see activity in the service sector rebound to 55.2 in February, up from 54.1 in January, as Omicron restrictions eased and the work from home rule was abandoned. Meanwhile, the manufacturing PMI is expected to remain elevated around 57.2.  Strong PMIs could help the FTSE extend gains towards 7630, the January high and GBP/USD aim towards 1.3650.

German PPI, EZ PMIs

In Europe, German producer prices continued to rise in January. The PPI index which measures inflation at wholesale level jumped to 25% YoY, up from 24.2% in December. PPI, which is often considered a lead indicator for consumer inflation, suggests that prices are likely to continue rising for the time being. 

The DAX is unfazed by surging inflation and is set to open the week around 1% higher, after dropping 2.5% last week. The euro is also in demand, supported by cautious optimism for a diplomatic solution with Russia and by high inflation, which could prompt the ECB to adopt a more hawkish stance.

PMIs on the continent are also expected to rebound after weakness in January. The easing of the Omicron restrictions in February is expected to result in activity rebounding, albeit mildly. The Eurozone composite PMI is expected to rise to 52.7, up from 52.3. The level 50 separates expansion from contraction.

FX

In the FX markets the risk sensitive Australian dollar is leading the charge higher. A strong recovery in business activity is also helping the aussie gain ground. The service sector PMI defied expectations jumping to 56.4 in February, up from 46.6 in January. Expectations had been for a decline to 42.6. As a result, the composite PMI rose to 55.9 up from 46.7 suggesting that the economic hit from Omicron was contained and that the rebound is in full swing. AUD/USD trades comfortably above 0.72.