© . FILE PHOTO: Russian ruble coins can be seen in this image, taken Feb. 24, 2022. REUTERS/Dado Ruvic/Illustration The war in Ukraine, and its fallout, remains at the center of markets. How much more pain awaits the Russian economy? Can oil rise even higher? US inflation data is expected on Thursday, the same day the European Central Bank is holding a crucial policy meeting. This is your week ahead in markets from Kevin Buckland in Tokyo, Ira Iosebashvili in New York, Tommy Wilkes, Julien Ponthus and Dhara Ranasinghe in London. 1/ RUSSIAN PAIN After a barrage of Western sanctions, the Russian economy will see a sharp economic contraction and rising inflation. The risk of default increases. Aside from the ruble, which has hit a record low, most Russian markets have closed since the West imposed tougher sanctions following Russia’s invasion of Ukraine. Foreign investors are trying to get money out of Russia – if they can. They have found that their assets have been frozen as sanctions, restrictions imposed by Russia and a lack of liquidity make it impossible to leave. It was also difficult to determine the full extent of the damage. Asset managers hope for more clarity about how little their Russian investments are actually worth. Many will also brace for Western sanctions to go even further and target Russia’s energy industry. Expect more breathtaking moves in the ruble and oil prices as they do. US Dollar vs Russian Ruble https://fingfx.thomsonreuters.com/gfx/mkt/jnpwebjnbpw/rouble.PNG 2/ WHEN IS THE PEAK? Expect data from Thursday to show that US inflation rose again in February, confirming what we all already know: The Federal Reserve is likely to raise interest rates in March. Economists forecast inflation of 7.8% year-on-year, surpassing the four-decade high inflation rate of 7.5% in January. The war in Ukraine has dampened expectations for aggressive Fed rate hikes, but stronger-than-expected inflationary pressures could increase the likelihood of a more aggressive stance. That would hurt risky assets, which have already been rattled by Ukraine-linked uncertainty. The Fed says it is focused on containing price pressures. Its credibility could be jeopardized if inflation deteriorates, affecting household purchasing power and disrupting investment and spending decisions. Friday’s University of Michigan Consumer Confidence Index could provide an idea of how consumers are doing. CPI https://fingfx.thomsonreuters.com/gfx/mkt/egpbkqjakvq/Pasted%20image%201646259171522.png 3/ ROCK, HARD PLACE, ECB Before Russia invaded Ukraine, the European Central Bank meeting on March 10 was expected to accelerate the exit of ultra-simple policies. Inflation at a record high of 5.8%, more than double the target of 2%, reinforces that argument. Here’s the problem. By triggering a new rise in energy prices, the war is putting upward pressure on inflation. At the same time, it harms consumption and economic growth. The ECB’s plans are confused and major decisions on Thursday seem unlikely. President Christine Lagarde could come under pressure as to whether she expects an interest rate hike, after backtracking last month on a pledge not to hike rates this year. That was before war broke out in Europe, leaving the ECB between a rock and a hard place. Money markets scale back bets on ECB rate hike. Western sanctions against Russia hit banks that are exposed to or hold assets in that country’s companies. It begs the question of whether multinational groups like Austria’s Raiffeisen or France’s SocGen will divest or take their units in the country, and at what cost? Second, the ECB’s expectations for rate hikes – which have benefited banks – have been sharply revised downwards. Finally, bank stocks are cyclical stocks that investors tend to dump first when the macroeconomic environment deteriorates. The sector has lost more than a quarter of its market value in about three weeks. Even if the coming week brings stability, it will be a bitter pill to swallow for investors who had bought into what was the consensual buy into 2022. Banks https://fingfx.thomsonreuters.com/gfx/mkt/dwvkrlkmrpm/Pasted%20image%201646310865293 .png 5/ IT’S THE ECONOMY, COMRADE And in China, the National People’s Congress is making headlines. The annual session of the Chinese parliament with stamps lasts about a week from Saturday and sets key economic and policy goals for the year. The key word is stability. Beijing is eager to get its slowing economy back on track ahead of an even more important event later this year: the bi-decade party congress where President Xi Jinping will almost certainly secure an unprecedented third term as leader. That means more fiscal stimulus, higher tax cuts and continued loose monetary policy, while putting any plans for painful reforms – such as a long-awaited ‘welfare tax’ – on the back burner. Don’t expect any comment on Ukraine either: China has not condemned the Russian attack and says Western sanctions against Russia are unfair. China goes for growth https://fingfx.thomsonreuters.com/gfx/mkt/xmvjoebqlpr/Pasted%20image%201646293762459.png
