Geopolitics & Fed jitters weigh on sentiment

Geopolitics is set to dominate the start of the week amid rising fears that Russia could send forces into Ukraine at any time. PMI data could attract some attention as traders await the FOMC decision on Wednesday.

• Russia – Ukraine tensions escalate
• Fears of a hawkish Fed in focus ahead of FOMC (2-day meeting starting tomorrow)
• UK & European PMIs due to be released

Weakness in Asia overnight is set to spill over into Europe as Fed fears and growing concerns over tensions in Eastern Europe hurt sentiment.

Geopolitical fears are front and centre amid rising tensions between Russia and Ukraine. Over the weekend, the Biden administration ordered families of diplomats out of Ukraine amid the continued threat of military action, warning that Russia could send forces into Ukraine at any time. US – Russia talks, last week, failed to pave a way to ending the Russia – Ukraine standoff.

The EU has more to lose than the US in this conflict, given that Russia is not only the EU’S fifth largest trading partner, but is also its top energy supplier. Surging inflation and energy prices are already dampening the economic recovery in Europe, so EU officials are likely to tread very carefully around the idea of sanctions on Russia.

Fed meeting 

In addition to the unfolding geopolitical situation, the markets are also focused on the Fed, as the FOMC meeting is due to kick off tomorrow. According to the CME Fed watch tool, a small percentage see the Fed hiking rates this week. However, the large majority expect policymakers to tee-up the market for a rate cut in March. 

Jitters over a more hawkish Fed have sparked a rotation out of high growth tech stocks this year, with the Nasdaq plunging over 10% into correction territory. 

PMIs

Before the Fed meeting begins, today sees the release of PMI data from the UK, Europe and the US for January.

Growth in the UK service sector slowed significantly in December to 53.6 from 58.5 in November, as Omicron cases surged. Businesses were short-staffed, and people stayed out of city centres after the government re-imposed work from home measures. Hospitality, and retailers were hit the hardest. The expectation is for a slight rebound in activity in January, as Omicron cases ease and postponed Christmas reunions take place. The UK’s dominant service sector is expected to see activity rise to 54.6.

The picture isn’t quite so upbeat in Europe, and particularly in Germany, the eurozone’s largest economy. The service sector in Germany contracted in December, falling below the key 50 level, amid surging COVID cases, tighter restrictions, soaring energy prices and an almost 3-decade high level of inflation. With these factors continuing into January, the service sector PMI is expected to remain depressed, falling to 48 from 48.7. The level 50 separates expansion from contraction.

Boris Johnson’s future in the balance

In the FX markets, the euro is coming under pressure, weighed down by Russia – Ukraine fears and ahead of the PMI releases. 1.13 will be a key level for the bulls to protect.

GBP is finding some support versus the euro from the improving Omicron picture, although political uncertainty could keep a lid on any GBP gains. Boris Johnson, like a cat with nine lives, has so far managed to cling onto power amid the “party gate” scandal. The official enquiry by ethics chief Sue Gray is due to be released later this week, with most MP’s waiting for the report to take a decision on Boris Johnson’s future. This could mean that volatility in the pound picks up this week.