Stocks head lower in a sombre mood, oil rises

Europe is heading for a softer open, after a stellar previous week, when optimism surrounding Ukraine peace talks saw stocks enjoy the best weekly gains since November last year.

• Peace talks continue, but Mariupol refuses to surrender, hurting risk sentiment
• Oil prices rise on fears of EU banning Russian oil
• EURUSD falls after solid gains last week. ECB’s Lagarde & Fed’s Powell are due to speak

The DAX rallied 5% last week and is set to open -0.4% lower today. The FTSE booked gains of 3.5% in the previous week, rising above 7400. The UK index is looking to open flat today.

Russia, Ukraine peace talks continued over the weekend, with Turkey reporting that progress was being made towards agreeing to some key points.  However, the heaving bombing of Ukraine and particularly the capital Kyiv by Russian forces and Ukraine officially rejecting the deadline from Russia to lay down arms and leave Mariupol is keeping investors on edge, hurting risk sentiment.

While the equity market has seen volatility ease slightly over the past week, commodity markets, particularly oil, continue to see wild swings. Last week, oil prices fell 4%, extending losses of 5% the previous week. Both benchmarks closed well over the critical psychological level of $100, keeping inflation fears front and central.

Oil

Oil prices have jumped over 3% higher ahead of the European open as the EU considers joining the US, banning Russian oil. The EU is far more dependent on Russian oil than the US  and has so far backed away from such a move. However, there is little sign of the conflict easing, raising the prospect of more onerous sanctions from the West. 

European Union governments and US President Biden are set to attend a series of summits this week to see how to harden the West’s response on Moscow. Separately an attack on a Saudi Arabian oil plant by Yemen’s Houthis is also lifting the price.

Central bank speakers

With oil prices on the rise, inflation remains a crucial concern for the market. German PPI showed that wholesale inflation rose to a record level of 25.9% YoY in February, even before the effects of the Ukraine crisis began to ripple out. ECB’s policymakers speaking over the last week, including Holzmann and de Guindos, defended the central banks’ lack of action in the last meeting. Attention will now turn to Lagarde, for further insight into where she sees inflation heading.

EUR/USD

EURUSD rallied 1.3% last week amid the improved market mood and after the USD failed to capitalise on the more hawkish Fed. Today, the USD is being supported by safe-haven flows. Fed Chair Powell is also due to speak later and could offer fresh impetus, less than a week after the Fed raised interest rates by 0.25% and signalled to a further six hikes across the year. 

EURUSD is easing back from 1.1140, the three-week high reached last week but remains above its two-week rising trendline. It would take a fall below 1.10 to negate the near-term uptrend.