War and Peace

A relatively quiet week lit up yesterday as peace negotiations between Russia and Ukraine took place in Turkey. Even if, per the Russian delegation, there is a long way to go before an agreement can be reached, waves of hope washed over the financial markets. Moscow has stated that it wants to ‘radically’ reduce its military activity in western Ukraine. Talks touched on the issue of Ukraine’s neutrality and the concession that it will not join NATO. In return, Kyiv requested that this neutrality be guaranteed by third-party states and that it be allowed to join the European Union. The talks did not address the separatist territories and Crimea, which will have to be dealt with separately.

Obviously, nothing is settled, and it remains to be seen whether anything will come of these statements. The markets, however, hungry for good news, reacted immediately and pushed the euro-dollar pair above the 1.11 mark. Other European currencies such as the Polish zloti, the Czech koruna and the Hungarian forint also benefited from the apparent ease in tensions. The rouble has risen sharply and has fallen back through the 100-rouble mark against the dollar. It has returned to its level of a month ago: a dollar traded between 85 and 90 roubles this morning. Nevertheless, spreads are still high and the main problem in dealing with this currency – apart from an illiquid market – is the settlement itself, i.e. the flow of currencies between the different banks that are party to the transaction. In the short term at least, it seems that the rouble is reacting to good or bad news coming from the military front, in line with the currencies of the European community. In the medium and long term, we will of course have to pay more attention to economic news: the impact of sanctions on the Russian economy, the risk of default on sovereign debt, the problem of fossil fuel exports, etc.

The price of a barrel of oil yesterday was highly volatile. When the news came out on the talks, crude prices in the US and Europe dropped $8 instantly. WTI briefly dipped below $100 a barrel. Another factor weighing on prices is the COVID (Omicron variant) outbreak in China, which is forcing the government to shut down large cities. A new approach is being tried: half of Shanghai is on lockdown for 4 days and then at the end of these 4 days the other half will be locked down. The aim is to test the entire population and, above all, to avoid locking down the country’s economic capital. Oil quickly found support and eventually returned to its pre-talks levels around $106 and $112.  The OPEC will be meeting tomorrow and is expected to stick to its plan to gradually increase supply (+400,000 per day each month) However, the United Arab Emirates has stated that it wants to go further. It remains to be seen whether they will convince the other members.

This week, the yen accelerated its decline and reached its lowest level against the greenback since 2015, when it traded at 125 yen to the dollar. On Monday, the Bank of Japan announced that it would buy 10-year government bonds without limit in order to counter the rise in long-term rates. The country’s situation differs from that of the other developed economies: with its low inflation, it can afford to maintain an accommodative monetary policy. The result is a weak currency, which suits the government as it favours exporting companies.

In the unlikely case anyone doubted it, the Swiss National Bank is back to intervening in the foreign exchange market. Demand deposits, which stand at CHF 731.5 billion, are up from last week. This means the SNB is seeking to counter the strength of the franc. It should be noted that the easing of tensions in Ukraine is pushing down the CHF. This morning the exchange rate was CHF 1.0314 and CHF 0.9278 against the euro and the dollar, respectively.

We also want to mention bond yields: in the last few days, French, Belgian and Dutch two-year sovereign rates have risen back above 0. Yesterday, it was the German 2-year bond that returned to positive rates for the first time since 2014. The yield curve continues to flatten.   In the US, the average yield on 2-year Treasury notes even briefly rose above the 10-year yield. This is only the third time in 21 years that such a reversal has occurred. Economic theory sees the phenomenon as a harbinger of recession because the market signals that it is less confident in long-term economic growth than in the short term. In the next few days, we will have to watch for the Q4 GDP figures and US employment report on Friday.