Ukraine fears intensify on Putin move.

During European trading on Monday, Russia held a security council meeting with strong expectations that President Putin would announce a decision to recognise the separatist-held regions of Ukraine.

After the European close, Putin confirmed that Russia would recognise Luhansk and Donetsk.

There was strong criticism of the move by Western countries and threats that sanctions would be imposed. Markets were concerned that the move would lead to an escalation in the conflict.

In Asia on Tuesday, there were reports that Russian forces had entered the two regions in what Russia described as a peacekeeping operation while the US stated that it will announce fresh sanctions later in the day.

Overall concerns over the situation continued to increase and dominated financial markets. Risk appetite gradually deteriorated during Monday amid Ukraine concerns and there was fresh demand for defensive assets as equity markets came under renewed pressure.

This trend continued on Tuesday as Russian forces were reported as entering parts of Ukraine. Global equity markets moved sharply lower, although there was a slight recovery from intra-day lows recorded in Asia.

There was fresh demand for defensive assets including the yen and Swiss franc while the Euro lost support. Demand for precious metals also increased Gold posted renewed gains to fresh 8-month highs.

The UK manufacturing PMI index was unchanged at 57.3 for February while the services-sector index strengthened sharply to an 8-month high of 60.8 for the month from 54.1 in January and above expectations of 55.7. New orders increased strongly on the month and employment increased at a faster rate. Input cost inflation remained high with the second fastest rate of increase in the services sector.  There was a further strong increase in charges with the second-highest increase on record.

The data underpinned expectations that the economy was rebounding quickly from the Omicron variant and that inflation pressures remained strong which also maintained expectations that the Bank of England would raise interest rates further.

There will be several scheduled comments from Bank of England (BoE) officials this week which will influence market expectations.

Deputy Governor Ramsden, who voted for a 0.50% rate hike in February, will make a speech on Tuesday. Governor Bailey and other MPC members will then appear before the Treasury Select Committee on Wednesday and will inevitably be grilled over the inflation developments.

Markets will be looking for any evidence on the potential outcome of March’s policy meeting. Euro-zone services sector also strengthens.

The latest The Euro-zone manufacturing index also edged lower for February, although output growth hit a 5-month high. There was a strong rebound for the services-sector index to a 3-month high of 55.8 from 51.1 and well above expectations of 52.2 as the Omicron impact proved short lived.

Although there was a slight easing of input cost inflation for manufacturing, overall costs increased at the second highest rate on record and average prices charges for goods and services increased at the fastest pace on record. The ECB will have to take note of the inflation pressures.

Risk conditions gradually deteriorated during Monday as markets fretted over the Ukraine situation and there was a further dip after the European close. The Euro was undermined by increased regional security fears.

The yen gained a fresh element of defensive demand with USD/JPY dipping below 115.00 and 2-week lows near 114.50. The Swiss franc also posted strong net gains with EUR/CHF losses to around 1.0350. EUR/USD retreated to lows below 1.1300 and traded below this level on Tuesday.

Solid UK data underpinned Sterling, but weaker risk appetite sapped potential buying. GBP/USD edged below 1.3600, while GBP/EUR posted a net gain to 2-week highs near 1.2025 before a slight dip.

AUD/USD drifted lower as equities came under pressure but was resilient in Asia with AUD/USD close to 0.7200. USD/CAD consolidated just above 1.2750 with higher oil prices providing only limited Canadian support.

Scandinavian currencies were hampered by Ukraine concerns with EUR/SEK testing 21-mnth highs near 10.70.

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