Asset market rotation
Analysts have said commodities stand to gain if Russia decides to occupy the Ukrainian capital Kyiv, with oil, gas, gold, wheat and corn all flagged as candidates for abnormal price moves in a turbulent geopolitical environment.
Benchmark government bond yields fell on Friday as investors bought bonds to hedge against the unknown consequences of a major war on Europe’s borders.
“I think a war will mean wobbly stock markets, but I think the impact on bond yields is questionable because a war would exacerbate current supply chain bottlenecks, it would likely mean a rapid increase energy prices and that could make inflation problems worse,” said Stephen Miller, economist and adviser at GFSM Funds Management.
“So I don’t know how that impacts bond yields, bonds are a safe haven, but I find it difficult to hold a 10-year US bond at 2% when headline inflation is 7% and not showing not many signs of slowing down.”
Benchmark 10-year US Treasuries returned 1.927% at Friday’s close, after yields hit 2.06% – their highest level since July 2019 – on February 15 after war fears eased after Russia claimed that some military units had returned to their bases.
Elsewhere, WTI and Brent crude oil futures closed at $91.80 and $93.80 a barrel on Friday, after falling in the last two days of the week on hopes Iran would sign a new nuclear agreement with the Western powers.
Gold closed at $1,900 an ounce and hit a 2022 high of $1,905 an ounce on Friday, with analysts leading it to believe it would have to advance in the event of war.
“I think things like gold can be a safe haven,” Miller said. “But until the last few weeks gold was sort of a bummer for the inflation hawks so I hesitate to say that but what a war would mean is a sustained rise in price raw material.”
Interest rates and earnings
The main local economic data for next week is December quarter wage growth, which the Reserve Bank forecasts will show a 0.6% quarter-on-quarter gain that will translate into annual wage growth. 2.25%.
Analyst consensus forecasts are more hawkish, calling for 0.8% quarter-on-quarter growth, with annual growth around 2.5%.
Annual wage growth is a key economic data point for the Reserve Bank as it faces pressure to raise benchmark rates once annual wage growth reaches about 3% and it judges that the inflation is permanently within its target range of 2 to 3%.
On Wednesday, the Reserve Bank of New Zealand is expected to raise cash interest rates for the third time since October, to take the rate from 0.75% to 1%.
“It shows the differences in approach between the RBNZ and the RBA,” Miller said.
“Now nobody knows who is right and who is wrong. I suspect the RBA is erring on the side of too much monetary accommodation. You could probably carry the opposite charge to the RBNZ.
Other economists such as AMP’s Shane Oliver forecast a 50 basis point rise in the RBNZ to take its rate to 1.25%.
In the United Kingdom, two consecutive rate hikes by the Bank of England to a cash rate of 0.5% drew analysts’ attention to the risks of an inverted bond yield curve, the spread between 2- and 10-year government bonds shrinking to just 12 basis points.
In the United States on Friday, core data on private final consumption inflation is expected to show 5.2% year-on-year growth, a gauge closely watched by the Federal Reserve.
In Australia and the United States, corporate earnings reporting season will enter its final leg with the consensus profit forecast for Australian companies up 6% over the past month, according to monthly data from Refinitiv.
On Wednesday, mining giant Rio Tinto is expected to report 21% growth in underlying earnings for the year as a whole, with brokerage Morgans shoving a final dividend payout of US$4.95 per share.
Analysts are calling on supermarket giant Coles to pay a 33¢ dividend on half-year profit of $506 million when it reports Tuesday.
The Australian dollar closed slightly lower on Friday to buy US71.8¢. While the cryptocurrency bitcoin fell below US$40,000 over the weekend to extend a trend of mirroring risk moves in assets such as stocks.