Markets grab at Ukraine peace talks hopes.

Headlines surrounding the conflict in Ukraine focussed on a Russian air strike which caused major damage to a maternity hospital in Mariupol.

There were no major strategic developments with conditions in Mariupol desperate. Western countries continued to promise further military support including anti-aircraft missiles without declaring a no-fly zone.

Markets took a more optimistic stance over a possible diplomatic solution following reported comments that Ukraine would be willing to promise future neutrality.

Talks between Russian and Ukraine foreign ministers are due in Turkey on Thursday. The US warned that Russia could use non-conventional weapons.

During Wednesday, there was a big recovery in risk appetite with tentative buying interest and a substantial wave of short covering in equities as markets wanted to focus on the possibility of a diplomatic solution in Ukraine.

Wall Street equities posted substantial net gains with European bourses also posting a strong advance with the German DAX index surging close to 8.0% on the day. There was also a strong rebound in the Euro on the day as energy prices retreated sharply.

After reports of intransigence within some OPEC members the previous day, there was some evidence of a U-turn during Wednesday with the UAE indicating that it was ready to supporting increased output. Iraq also indicated that it was prepared to lift production.

The moves dampened fears over a major global supply squeeze to some extent with expectations that demand would also weaken. Oil prices declined sharply on the day with a slide of over 15% at one stage.

The strong rebound in risk appetite and slide in oil prices was important in undermining demand for safe-haven assets with sharp losses for gold during the day as gold also failed to break fresh record highs. The Yen and Swiss franc also lost ground in global markets, although the underlying mood remained cautious.

The latest US inflation data will be released on Thursday with the headline rate expected to increase to a 40-year high of 7.9% from 7.5% in January with the core rate forecast to edge lower to 5.9% from 6.0%.  The data will need to be substantially away from market expectations to push the Federal Reserve away from a 0.25% rate increase at next week’s policy meeting.

The White House warned over a high headline reading and an in-line reading could provide relief.

The ECB will hold its latest policy meeting on Thursday with markets expecting that the central bank will look to maintain maximum flexibility in light of the Ukraine conflict. There are also expectations that the overall rhetoric will be less hawkish with a commitment to support financial conditions.

Markets will also be monitoring the EU Summit amid expectations of a new defence and energy stimulus package financing through bonds. If the EU members fail to agree a package, the Euro is likely to come under renewed pressure.

The Euro continued to recover ground on Wednesday with a more positive risk tone and decline in energy prices underpinning sentiment. EUR/USD posted strong gains to highs just below 1.1100 before consolidation around 1.1050 in early Europe on Thursday. Higher US bond yields helped support the dollar against the yen. USD/JPY edged just above the 116.00 as defensive yen demand also faded

Sterling struggled to make any overall headway despite the marked improvement in risk conditions and a strong RICS housing survey. GBP/USD posted a net advance to 1.3180 as the dollar retreated against European currencies. GBP/EUR continued to slide lower with net losses to just below 1.1900.

AUD/USD posted net gains as equities rallied with net gains to 0.7335. The Canadian dollar posted a net gain, although USD/CAD found support below the 1.2800 level.

The Swedish krona posted a strong recovery as risk appetite recovered with EUR/SEK around 10.74. EUR/NOK rallied to 9.85 despite a higher than expected Norwegian CPI print.

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