Flight to safety

Tensions rose sharply on Friday when a US official said that a Russian attack on Ukraine appeared imminent and could take place before the end of the Olympic Games. The US equity market plunged as well as long rates (the US 10 year is back below 2%), with investors rushing to the safest assets such as US Treasuries (lower rates = higher Treasuries prices). The dollar strengthened, with the exchange rate against the euro falling from 1.14 to below 1.1350. Commodity prices also soared. These trends were confirmed in Asia and at the opening of the European markets this morning.

In the current context, it is important to keep in mind that all this only adds to upward inflationary pressures. Russia is a major energy producer and we should not forget that Ukraine is a major food (grain) supplier. On Friday, the fall in the University of Michigan’s confidence index to its lowest level in 11 years confirmed the damage of soaring prices on the purchasing power of US households. The market will be tossed between these two pitfalls over the next few days: geopolitical risk and inflation.

No economic data today but the ECB President in front of the European Parliament and James Bullard, the St Louis Fed President and supporter of an aggressive Fed action, on CNBC.