End of the beginning?
Markets took a decisive turn yesterday unwinding much of the highly defensive positioning that has characterised many recent trading sessions. The move to adjust to a less doomsday mindset in markets was likely catalysed by the West’s latest round of sanctions. Over the weekend and into trade on Monday, speculation loomed large that Europe, the UK and the US were looking to heavily penalise the export of Russian commodities upon which the country is so heavily financially reliant. These would of course be thought to include commodities within the energy sector, notably Oil and Natural Gas.
The US, we learned when President Joe Biden addressed the nation, would seek to block Oil and Natural Gas imports from Russia. The UK and Europe however, made no such commitments to the latter systemically important energy import, natural gas. In Germany and the UK, the provision of natural gas was seen as too important to the macro economy to sanction at this stage. This signalled to the market that the sanctions which they fear for concerns over global and regional growth as well as wider risk, volatility and asset pricing, had underwhelmed expectations once again.
With the open of trade on Wednesday, it was clear that markets were more sanguine about the global economy. Despite conflict and tragic headlines still flowing from the east of the European continent, financial conditions were normalising. Implied volatility, which had previously been indiscriminately purchased across asset classes, was lower with EURUSD implied volatilities within the front three months of the options market down around half a vol.
In the spot market, a previous hoarding of USD liquidity that had driven the price of the greenback up several cents gave way to a retracement. Testing and breaking several resistance levels, EURUSD is showing a revival in favour of the recently lack lustre Euro.
Discussion and Analysis by Charles Porter
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