Ukraine border skirmishes, US Russian invasion warning roils markets

Europe

We’ve seen another day of uncertainty and market declines on claims and counter claims between Russia and NATO about the size and movement of Russian forces on the Ukrainian border. Russia has continued to deny that it is increasing the size of its forces, while reports of shelling and firing on a village in Eastern Ukraine by pro-Russian forces, hasn’t helped sentiment, with pro-Russian forces blaming Ukrainian forces.

This is likely to be the bigger concern for NATO and the US, if separatist forces try and goad Ukrainian forces into a counter-response, thus creating an excuse for a Russian incursion, and for all hell to break loose.

It’s therefore not surprising that against this backdrop we’ve seen European markets come under pressure as the gains of Wednesday disappear. The bigger risk for markets is that President Putin simply leaves the bulk of his forces on the border and simply plays a game of cat and mouse for the next few weeks and months.

Airlines have once again borne the brunt with falls for Wizz Air, IAG, and easyJet, while the likes of Lufthansa and Air-France KLM have also been clobbered.

Evraz has seen its shares slide back over concerns that if conflict breaks out, it could see its business adversely affected by possible sanctions.

A slide in oil prices has also seen BP and Shell share prices slide back.

UK banks reporting season has started today with Asia focussed bank Standard Chartered reporting an increase in pre-tax profits of 55%. Operating income for the year came in slightly below last year, while operating expenses increased by 2%.

Pre-tax profits for the year rose to $3.9bn, slightly below expectations, with the bank announcing a $750m share buyback, along with a full year dividend of 12p a share. As for the outlook expenses are expected to increase by $0.4bn, and income is expected to rise between 5% and 7%, with the help of a tailwind of rising interest rates. The bank also said it was looking to cut $1.3bn in costs to help improve its ability to generate returns. Investors seem less than convinced with the shares falling back to the bottom of the FTSE100.

Concern about margins has been a recurring theme this earnings season, with a lot of consumer goods company CEO’s and CFO’s speaking out about rising input costs eating into profits.

Last week it was Unilever CEO Alan Jope, and today we’ve had Reckitt Benckiser and Nestle both point to the same issues in their latest corporate updates.

Markets have reacted positively to today’s full year numbers from Reckitt Benckiser despite a 5.4% decline in net revenues to $13.23bn, though it should be mentioned that 2020 saw a big jump in sales due to Covid and spending on hygiene products. On an adjusted basis, excluding the disposals of Scholl and IFCN China, revenues rose 3.3% on a like for like basis to £12.85bn.

The disposal of the IFCN China business for £1.4bn completed in September, and saw the company take a pre-tax loss on disposal of £3.2bn.

As a result, the company slipped to a 2021 pre-tax loss for the year of £260m, compared to a profit last year of £1.87bn. With the disposal of the IFCN China business completed, revenue forecasts for 2022 are expected to see growth of between 1% and 4%.

It’s a similar theme at Nestle, who reported a 3.3% rise in sales revenue, and net profits of 16.9bn CHF. Organic sales increased by 7.5% in 2021, however this is expected to slow to 5% in 2022. The company warned that rising inflation was likely to impact its margins in 2022, and that operating margins would be between 17% to 17.5%, compared to 17.4% this year.

US

US markets dropped sharply on the open, taking their cues from Europe and rising concerns that a Russian invasion of Ukraine may be imminent, as sentiment once again takes a nosedive over events in Ukraine. US yields are also falling back as capital flows into the haven of US treasuries.

The US ambassador to the United Nations, Linda Thomas-Green told the UN Security Council that a Russian invasion was “imminent”. This was the very same adjective that was used to suggest an invasion would take place by February 16th this week. This does present a problem in that eventually the word starts to lose its impact if nothing happens afterwards. You are then faced with the problem of the little boy who cried wolf once too often, and when the invasion does happen everyone is caught off guard.

US weekly jobless claims were a mixed bag with the headline number rising to 248k, however continuing claims fell back to below 1.6m, while housing starts fell for the first time in 4 months.

In the wake of its Q3 numbers Nvidia shares hit new record highs after blowing through expectations on revenues and profits, while posting a bullish outlook for Q4. Since then, the shares have slipped back, and while yesterday’s Q4 numbers beat expectations on revenues and profits, markets appeared less than impressed with its Q1 guidance of $8.1bn, which is $900m above consensus, sending the shares sharply lower. For a business that has consistently outperformed over the past 12 months this seems a bizarre reaction and goes to show what a high bar is being set for Nvidia management. For Q4 revenues came in at $7.64bn, well above expectations, while profits rose to $1.32c a share, marking 4 successive quarters of revenue growth. The decision to walk away from the ARM deal is expected to cost Nvidia $1.36bn, which while disappointing is probably a wise decision.

The spat between Amazon and Visa over credit card fees appears to have reached a conclusion, after Amazon threatened to stop the use of Visa credit cards to pay for goods and services on its platform due to a sharp increase by Visa in its online transaction fees.

Walmart’s latest Q4 numbers have seen another set of stellar numbers, with Q4 revenues of $152.87bn and profits of $1.53c a share. Total annual revenue rose 2.4% to $572.8bn.

The retailer said that higher supply chain costs of $400m in Q4 were challenging, but were dealt with, as same store sales rose 5.6%, above expectations of 5%. Its outlook for 2023 is for sales growth of 4%, above expectations of 3.1%. Walmart also said it would be buying back another $10bn of shares in 2023.

Palantir shares have plunged after reporting a disappointing set of Q4 numbers. The company still relies for the most part on US government work, to the tune of $897m out of total revenue of $1.5bn. While it is doing well on revenues, profitability continues to be its main problem, with losses for Q4 coming in at -$59m, higher than expected. Operating margins fell short of expectations, coming in at 23%, well below consensus of 26.6%.

FX

It’s been a mixed bag for currencies today, with the Japanese yen, and Swiss franc outperforming on reports of an exchange of fire on the Ukraine, Russia border, as well as a wider deterioration of US, Russia relations after Russia expelled the Deputy Ambassador to the US embassy in Moscow.

The pound rather surprisingly is also performing well, given that it tends to perform poorly when risk sentiment is fragile, but it is edging back towards its February highs against the US dollar

Commodities

Brent crude oil prices appear to be ignoring the increasing tension on the Ukraine border, and focussing more on the talks with Iran, over a possible deal on the resumption of Iranian crude exports. Prices have slipped back towards their lowest levels this week.

Gold has taken another leg higher, breaking above its November peaks to hit an 8-month high, as tensions continue to rise on the Ukraine, Russia border, which in turn is driving palladium and platinum prices higher as well. With Russia a key exporter of both any further deterioration in sentiment is likely to push prices even higher.

Volatility

The UK’s cost of living crisis is hitting discretionary retailers and Boohoo.com is very much part of this set. Shares in recent days traded below one pound for the first time in around six years, but this has sparked interest amongst bargain hunters and is delivering price action as a result. One day vol stood at 122%, up from 89% on the month.

With the situation between Russia and Ukraine still fragile, this is continuing to drive sentiment across several commodities including oil and Palladium, with Russia being the biggest producer. WTO Crude one-day vol hit 41.6% up from 35.9% on the month, whilst Palladium advanced to 60.3% up from 51.7%.

In terms of fiat currencies, the US Dollar against the Hungarian Forint stood out with the pair being driven both by the Ukrainian situation and a potential funding battle with the EU. One day vol hit 16.07%, up from 12.52% on the month.

Shares in Oslo posted a marked recovery yesterday morning, leaving the local bourse as the one delivering the most notable uptick in price action, although activity globally did look rather subdued. One day vol was reported at 26.2%.

Crypto markets remain broadly subdued, although an outlier was alt coin “The Graph”. This saw significant support shortly after ICO and this week celebrated the one-year anniversary of its all-time high. The coin has lost around 80% of its value since then but one-day vol advanced to 107% up from a monthly print of 97%.