Russia launches attacks on Ukraine.

Markets were unable to escape the flow of headlines surrounding Ukraine during Wednesday. The US warned that Russian forces were now in a position to invade Ukraine on multiple fronts and that an attack was likely within the next 48 hours.

Overnight, Russian President Putin stated that Russia has announced a Special Military Operation in the Donbass region with military forces crossing the border. There were reports of military forces entering Ukraine from multiple points including Belarus and evidence of attacks on military airfields throughout Ukraine, including one near Kiev, as Russia looked to downgrade the Ukraine military response.

Cyberattacks also continued in an attempt to curb communications and undermine the Ukraine military and government.

Western governments and markets will be trying to assess the Russian objectives, in particular whether Putin will look to gain control of the Luhansk and Donetsk areas or seek wider control of Ukraine. The latter would have a much larger potential market impact.

The moves on fresh sanctions against Russia will also be an important focus with announcements likely during the day.

Markets had attempted to rally early on Wednesday, but confidence gradually deteriorated during the day. Equity markets moved lower and there was fresh demand for defensive assets. The yen and Swiss franc secured renewed backing while oil prices posted limited gains. Precious metals also secured renewed support later in the day.

These moves were amplified following reports of the Russian attack on Ukraine. The yen and Swiss franc gained further support while the Euro declined sharply. The dollar gained against European and commodity currencies.

Equities moved lower with the UK FTSE 100 index set to open over 3% lower and there was a fresh advance for precious metals with gold at 13-month highs. Oil prices spike to fresh 7-year highs.

After choppy trading on Wednesday, oil prices also spiked higher on the Russian attack on Ukraine. Brent surged to a fresh 7-year high around $102 p/b with WTI also posting fresh 7-year highs near $98.0 p/b.

Bank of England Governor Bailey stated that second-round effects very clearly pose a risk to inflation, but also stated that markets should not get carried away about the likely scale of interest rate increases.

MPC member Haskel warned that high levels on inflation might lead to more sustained upward pressure on nominal wages than embedded in the central projection.

Fellow MPC member Tenreyro commented that the inflation pick-up was likely to be larger and more persistent than expected previously and further modest tightening would be consistent with inflation returning to target sustainably. Overall, however, she downplayed the potential scope for interest rate increases.

There was a further dip in expectations that the Bank of England would opt for a 0.50% rate hike at the March policy meeting.

San Francisco Fed President Daly stated there was the need for more urgency on moving rates higher and likes a 0.25% move in March. She added that there may need to be more than four rate hikes this year. The rhetoric dampened expectations of a 0.50% rate hike at next month’s meeting. The overall market reaction was muted given the focus on Ukraine.

Risk conditions were unable to sustain a recovery attempt on Wednesday and gradually deteriorated during the day. The Russian attack on Ukraine triggered a sharper reaction in Asia on Thursday.

There was renewed support for the yen and Swiss franc. US yields also declined as Treasuries attracted defensive support with the 10-year rate below 1.90%. USD/JPY slid to 3-week lows below 114.50.

The Euro was subjected to renewed pressure and EUR/USD slumped to 3-week lows near 1.1200 before a recovery to 1.1240. EUR/CHF dipped to lows below 1.0300.

Sterling was hampered by the restrained Bank of England rhetoric. GBP/USD dipped to below 1.3500 as risk appetite dipped sharply. GBP/EUR edged higher to 1.2000 amid Euro vulnerability

Commodity currencies retreated as risk conditions dominated. AUD/USD retreated to the 0.7200 area. USD/CAD found support below 1.2700 and advanced to 1.2775 despite the surge in oil prices.

The Swedish krona lost ground with EUR/SEK just below 10.70 and close to 21-month highs. The Norwegian krone was resilient given the jump in energy prices with EUR/NOK around 10.08.

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