Rouble rebounds, oil jumps back above $100

European stock markets sagged and oil jumped back above $100 a barrel on Tuesday as markets struggled with massive uncertainty caused by Russia's invasion of Ukraine, while the rouble recovered from a rout driven by Western sanctions.

Russia's stock markets remained suspended and some bond trading platforms were no longer showing prices, but dealing in the major financial centres both in Europe and in Asia overnight was orderly.

The pan-European STOXX 600 index (.STOXX) slipped 0.9% with early mining (.SXPP) and oil & gas (.SXEP) sector gains outweighed by a 1.2% drop in bank stocks on the sense that interest rate hikes might now get delayed.

Oil giant Shell's shares (SHEL.L) barely budged after it became the latest Western firm to announce it was pulling out of Russia, including from a major liquefied natural gas plant. Its stock fell 1.4% in the previous session.

Paul Jackson, Global Head of Asset Allocation Research, Invesco said: "assuming no rapid resolution to this conflict, we fear that global GDP could be reduced by 0.5%-1.0%."

"That's enough to aggravate the ongoing slowdown but not enough to produce recession," although some parts of Europe could see a recession he cautioned, and inflation was stay higher for longer.

High-level talks between Kyiv and Moscow had ended with no agreement except to keep talking on Monday, and nerves were acute as a huge Russian armoured column bore down on Kyiv after lethal shelling of civilian areas in Ukraine's second largest city Kharkiv. read more

With Russia one of the world's largest oil producers, Brent crude futures were up $3.04, or 3.1%, to $101.01 a barrel. That was just below a seven-year high of $105.79 hit after Moscow launched its assault on Ukraine last week.

"The fragile situation in Ukraine and financial and energy sanctions against Russia will keep the energy crisis stoked and oil well above $100 per barrel in the near-term and even higher if the conflict escalates further," Louise Dickson, senior oil market analyst from Rystad Energy, wrote in a note.

Sanctions

The sense that the war and higher energy prices could slow the global economy meant euro zone bond yields continued to fall in the bond markets as traders further reduced their bets on rate hikes from the European Central Bank this year.

Benchmark 10-year US Treasury yields were sitting at 1.80% in European trading having been over 2% less than two weeks ago, while the euro resumed its decline in the currency market.

Momentum in euro zone manufacturing growth had already waned slightly last month, revised PMI data showed on Thursday, although it was still strong and firms said supply chain constraints had eased.

"Don't let the drop in the headline PMI distract from what should be viewed as a largely positive month for the euro area manufacturing sector in February," said Joe Hayes, senior economist at data compiler IHS Markit said.

Russia's rouble also stabilised after plunging as much as 30% to a record 120 per dollar after Western countries had slapped Russia with the most far-reaching sanctions ever placed on such an interconnected global economy.

Those measures include cutting Russia's top banks from the SWIFT international financial network and sanctioning its central bank in a bid to limit Moscow's ability to deploy its $630 billion of foreign reserves.

The rouble was trading at 94 per dollar , having recovered nearly all of Monday's losses helped by the Russian central bank's doubling of interest rates.

More broadly, currency market volatility is at its highest since late 2020, as measured by a Deutsche Bank index (.DBCVIX). The rouble is down almost 30% from its best levels this year.

"Today, the focus will be on whether sanctions/retaliation will start impacting the commodity flows from Russia, and whether (Russia's central bank) will step in with more measures to support the rouble," ING FX analysts wrote in a note to clients.

Trading in Russian stocks meanwhile remain suspended on the Moscow Exchange and Russian sovereign and corporate bond prices were not showing on some trading platforms.

Foreign investors held $20bn of Russia's dollar- and rouble-denominated government at the end of last year according to Russian central bank data while they own just over $85 billion worth of equities according to the Moscow Exchange.