Ongoing Market Commentary: Russia defaults on its debt

The war in Ukraine has tended to increase uncertainty regarding inflation and growth prospects. When and with what consequences this war will end is pure speculation, but capital markets are expected to build a certain immunity to the headline risks in the coming weeks. The medium- to long-term consequences, on the other hand, could be significant. It is possible that we are at the beginning of a new bloc formation or a new Cold War. This would put a significant damper on globalization and further fuel higher structural inflation. 

Wall Street gains accelerated in the last hour of trading on Friday with the Dow closing 823 points higher, the S&P 500 adding 3%, and the Nasdaq advancing 3.3% as expectations of higher and faster rate hikes cooled. While recessionary fears remained a top concern among investors, recent economic data pointing to a moderation in inflation expectations sparked speculation that central banks may take their foot off the pedal. All three major averages snapped three-week losing streaks with the Dow up 5.4%, the S&P 500 adding 6.5%—its biggest advance since May 2020—and the Nasdaq surging 7.5%. In Europe, the benchmark Euro Stoxx 50 ended up 2.8% on Friday, erasing weekly losses. 

Summary

• Shares in Asia advanced on Monday as concerns of higher and faster rate hikes continued to ease. The Hang Seng jumped almost 3% and the Shanghai Composite hit a near 4-month peak, boosted by the biggest daily cash injection in nearly 3 months made by the People’s Bank of China (PBoC). Markets in South Korea, Japan, and Australia were all up over 1% each. 
• European and US equity futures are pointing to a higher open as positive global momentum continues. 
• Oil prices slipped more than $1 a barrel this morning as global economic concerns depressed the oil demand outlook while investors eyed the Group of Seven (G-7) meeting this week for possible moves on Russian oil exports and a revival of the Iran nuclear deal. 
• The PBoC injected the equivalent of USD15 billion into the banking system on Monday, the largest daily injection since the 31^st March, to ease pressure from rising cash demand toward the end of H1. Demand usually surges towards the end of the quarter, when commercial banks also have to shore up cash positions for an administrative quarterly health check by the central bank.  
• Russia defaulted on its foreign-currency sovereign debt for the first time since 1918, the culmination of ever-tougher Western sanctions that shut down payment routes to overseas creditors. Sunday marked the end of the grace period on about $100 million of interest payments due 27^th May, a deadline considered an event of default if missed. 
• G-7 leaders will commit to providing indefinite support to Ukraine for its defence against Russia’s invasion, according to the text of a draft statement from their summit in Bavaria. Members of the alliance are concerned about the war dragging on and some, including Germany and France, have hinted that they may be more open to the idea of a negotiated cease-fire. 
• The German government may convert the part of the Nord Stream 2 pipeline under its territory and connect it with a liquefied natural gas terminal on the Baltic Sea coast, according to a media article. The expropriated part will then be cut off from the rest of the pipeline. Russia, meanwhile, noted that legal actions will be launched if Germany pushes through with the plan. 
• EDF, Engie and TotalEnergies’ bosses called on French companies and consumers to save energy for winter to tackle potential shortages after Russia cut exports. The leaders of the three companies wrote in a Sunday opinion piece that clients should reduce energy consumption to better manage the upcoming consumption peaks and to limit the impact of geopolitical uncertainties. 
• Shares of Tencent Holdings were down as much as 2.5% in early afternoon trading in Hong Kong after Prosus and its controlling shareholder Napsers said they intend to gradually sell shares in the company to fund a share purchase programme.