War in Ukraine: four volatile markets to watch
Volatility in oil, gold and FX continues as the war in Ukraine escalates.
Tensions in Ukraine grows while economic conditions deteriorate thus sending shock waves through global markets. For market participants, it’s becoming clearer that Russian President Vladimir Putin is dead set on toppling the Ukrainian Government, which, for market participants, risks a protracted and bloody war in Europe. The inevitable shocks to growth, global supply and financial stability are being discounted into market prices now, with surging commodity prices raising the spectre of slower economic activity, higher inflation and higher interest rates. Here we look at some of the key markets impacted by the developments, as traders remain on a war footing.
At the time of writing, crude prices are more than 35% higher than they were a week ago, with the war in Ukraine posing a major shock to global supply. The latest news driving oil higher have been due to reports that the US and Western allies are considering an embargo on Russian gas and oil exports, to strangle trade flows with the country.
The hit to global oil supply has pushed crude to levels not seen since 2008 and the recession that followed the global financial crisis. The weekly RSI has hit levels beyond that seen prior to that crisis, with the next key level of technical resistance the record highs around $US147 per barrel. There has been some selling around the psychological resistance level of $130 at the outset of the week. Support might be found around previous resistance at roughly $US115.
Higher oil prices is leading to a lift in market expectations for inflation, pushing real yields lower and driving investors into alternative stores of value. On top of that, tightening sanctions is pushing some corners of the market away from traditional, sanctionable assets and towards stores of value in so-called “outside” money. They are the fundamentals driving gold’s price higher, which has broken out to new highs to begin the week. The yellow metal is closing in on the $US2000 mark now, having broken resistance at around $US1965, which now acts as the most immediate level of support. From a technical standpoint, there’s not much that stands in the way of gold and fresh all-time highs at $US2080, as the daily RSI surges above oversold levels.
The war in Ukraine could be a devastating blow to Eurozone growth. A protracted conflict could send the region into recession, while supply disruptions and sanctions could drive energy prices higher and fuel inflation, leading to a potentially stagflationary mix. A big risk premium is being baked into European assets now, with yields also dropping on growth concerns, widening spreads against US Treasuries and risk-similar assets. The EUR/USD has fallen below 1.10 in recent days, having pierced support at 1.1010. The drop has driven the pair to the next level of major support at 1.0880, which if broken, could open a challenge of support at 1.0780 and fresh post-pandemic levels.
The AUD/USD has defied higher global volatility and is right now trading as a proxy for global commodity prices, decoupling in large part from the S&P500, with which it has been highly correlated for much of the pandemic. Heavy short positioning and a hefty yield premium at the back end of the curve is adding a tailwind to the AUD/USD, which could establish a trend reversal right now. The pair has broken out of its downward trend channel, and has cleared the 200-day MA, as the daily RSI pushes towards “overbought” levels. 0.7400 is the next major level of resistance, which, if broken, opens a push towards 0.7480. On the downside, 0.7290 could act as future support.
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