Market gyrations ease with traders recalibrating Russia risk

Traders are beginning to re-evaluate the impact of the Russia-Ukraine war on their strategies as the conflict grinds into a fourth week.

The greenback was little changed against major peers as Asia trading began Monday, after its first weekly loss in a month, even as the Federal Reserve hiked rates. Japan’s yen was also steady after hitting a six-year low.

Gauges of volatility in currencies, bonds and stocks have fallen in recent days as investors took heart from news that China didn’t want to see the invasion of Ukraine amid U.S. warnings against supporting Russia.

Meanwhile, Russia paid some dollar debts last week -- a relief to investors who feared the nation would use rubles and thereby trigger a default -- and China pledged to boost its economy.

More talks on ending the war are expected on Monday after Turkey said the two sides had made progress on key points but heavy fighting continued over the weekend, particularly in Mariupol.

With Russia on the hook for more foreign-currency payments in coming weeks, default risk remains significant. Trading in sovereign ruble bonds is poised to restart this week even as the nation’s stock market stays closed Monday.

Volatility gauges across asset classes have moderated “Investors are focusing on a whole raft of cushions that have come in, from China’s policy stance on supporting growth to falling oil prices and a recalibration of the Ukraine situation -- it’s a perfect coincidence of relief factors coming just on time,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore. “But while markets are happy to take relief where they can, there’s no sense of investors lurching from fear to greed anytime soon.”

Fed Effect

With a slew of central-bank meetings also in the rearview mirror, investors will be looking to parse the global effects of the Fed’s first rate hike since 2018, alongside last week’s decisions from the Bank of England and Japanese monetary authority.

The next big question for markets is how many more hikes the Fed is planning for 2022 and what impact this will have on the U.S. economic outlook, with increased concern about recession following another inversion in the Treasury yield curve. A slew of Fed officials are set to speak this week, as are policy makers from the BOE and European Central Bank.

Commodity-linked currencies remain in the spotlight due to the high price of natural resources. Australia has banned shipments to Russia of alumina, the key ingredient for producing aluminum. Japan, a major oil importer, has asked the United Arab Emirates to increase crude exports.

Meanwhile, Russian regulators are still exploring ways to reopen the country’s equity market, which has been closed since late February. The Bank of Russia will begin purchasing domestic sovereign bonds on Monday in an effort to stabilize that market as it reopens.

Uneasy Calm

The Bloomberg Dollar Spot Index finished last week down nearly 1%, with the greenback falling against all but one of its developed-market peers -- the yen. Japan’s currency faces further losses after its central bank recommitted to keeping its monetary policy easy.

“We are seeing an uneasy calm in markets right now -- markets have bought Mr Powell’s messaging so far but they could easily have a second think about it this week, while Ukraine-Russia news remain volatile,” said Andrew Ticehurst, rates strategist at Nomura Holdings Inc. “Markets are completely subject to headline risk.”