Massive market rebound after new sanctions unveiled

Stocks in Europe are expected to open higher after a reversal on Wall Street. The latest round of sanctions, German GDP and US inflation data are in focus.

• Western governments backed away from energy sanctions, cutting Russia out of SWIFT
• German GDP contracted by less than forecast, DA, EUR/USD rise
• US Core PCE inflation data expected to rise ahead of the March Fed meeting
• Oil eases from $105 high yesterday, but remains well supported

European bourses closed firmly in the red yesterday as Russia defied international protocol and invaded Ukraine. The DAX was hardest hit closing 4% lower, the FTSE wasn’t far behind, shedding 3.88%.

The sea of red transferred over to the US, with Wall Street opening firmly southwards. Sanctions were announced and whilst these were stronger than those imposed at the start of the week, with the focus still on Russian banks and the elite, they are still leaving the key areas of energy, crucial exports and, for now, the Swift payment system untouched. It is worth noting that while the US and the UK support Russia’s removal from Swift, the EU is not in agreement.

US stocks performed an impressive turnaround as yesterday’s session progressed, possibly owing to the fact that once again sanctions were not as harsh as feared, meaning that the impact on the global economy should be limited. Following on from the positive close on Wall Street, European stocks are set for a strong rebound today.

German GDP - DAX

Whilst Russia/Ukraine developments will be closely monitored there is also plenty of data for investors to digest. German Q4 GDP was upwardly revised in the final reading. The German economy contracted -0.3%, an improvement on the -0.7% forecast. The Bundesbank warned earlier in the week that they expect the German economy to contract again in the current quarter, hitting a technical recession, owing to Omicron absences from work, before rebounding in the Spring.

Still today’s better than feared data is adding to the more upbeat mood towards the DAX and the euro alike. The DAX is looking to start the day 1.3% higher, however a move over resistance at 14800 is needed to negate the near term downtrend. The EUR/USD is retaking 1.12, after rebounding from 1.11 yesterday’s low.

US Core PCE

Looking ahead, US inflation data could serve as a good distraction from ongoing geopolitical headlines. The core PCE reading is the Fed’s preferred gauge for inflation. Expectations are for the core PCE to rise to 5.1% in January, up from 4.9% in December. The data will be more keenly watched than usual as it’s the last PCE print ahead of the Fed’s March FOMC meeting, where policy makers will decide between a rate hike of 0.25% or 0.5%.

High inflation could boost the prospects of more aggressive tightening moves by the Fed, despite the eastern Europe conflict, boosting USD, whilst hitting demand for US indices and gold.

Oil

Oil prices went on a wild roller coaster ride yesterday. Brent shot up to $105 on fears of supply disruption as Russia invaded Ukraine, only to fall back below $100 as Western sanctions once again avoided the energy sector. Higher than expected crude stockpiles, in addition to President Biden saying that the US could release more oil reserves helped pull the price lower. Today, oil is on the rise again as fighting in Ukraine enters its second day. Oil prices are likely to remain supported around $100 until the Russian invasion ends or there is a sustained increase in supply.