What’s happening in Ukraine is a Black Swan event; it’s worse than the worst-case scenario that has been put on paper over the past couple of months, and it’s clearly not a limited military operation, it’s really a full invasion of a country, that no one could explain other than Putin’s regret for the Soviet Union’s demise and his unacceptance of the post-Cold War security architecture.
Sanctions are being imposed on Russian financial sectors, transport, and exports. Major economies will stop financing the Russian debt and cut the provision of semiconductors. Taiwan’s chipmaker TSMC said it’s fully committed to complying with new export rules. But there are sanctions that didn’t go through. Europe for example opposed to leave the Russian banks out of Swift, and Biden won’t impose sanctions on Russian energy, aluminum, and wheat industries to avoid penalizing the rest of the world. Still, the Russian energy companies are taking a very heavy toll right now. Gazprom shares dived up to 50% yesterday before closing the session 25% lower. Lukoil sank near 45% and closed almost 23% down, while the Moscow Exchange lost up to 30% before closing 20% lower. That’s understandable as Russian companies will be cut off from the rest of the world in terms of business and financing. But it is also said that only about 16% of the Russian companies’ cash holdings are in US dollars, the rest is in Chinese yuan, euro and gold, to help the companies carry on, at least for a while, as the crisis extends.
Bitcoin dilemma
Bitcoin could be a potential safe haven for Russian oligarchs avoiding sanctions as there will be no censor on the Bitcoin network and on cryptocurrency transactions. Russians will have trouble converting their money back to fiat money, yet the cryptocurrencies could act as a powerful store of value for a major part of holdings that don’t need to be liquid.
As a result, the Russian dilemma for cryptocurrencies could accelerate the regulation efforts and be a road bump in the process of adoption of these decentralized currencies in the traditional system.
Bitcoin has rebounded after dipping a toe below the $35K level, yet the price action was parallel to other risk assets, as the rebound happened as Nasdaq stocks rallied big, as well. We will see how Bitcoin will perform over the weekend when there will be no hint on how the other assets would react. The risks are tilted to the downside due to the intensifying geopolitical situation.
Why US equities rallied yesterday?
There is no satisfactory explanation that would grant the US equities a healthy positive correction. Among the most popular explanations, there is the possibility that investors gave a deeper thought about the US exposure to the Russian crisis, or the likelihood that the Ukrainian war could soften the Fed’s policy tone.
But in reality, it’s about volatility, high volatility that results from a high-voltage environment.
The rising volatility in Nasdaq warns that the winds could change direction very rapidly. This morning, the US equity futures are again in the red. It’s impossible to tell what direction the market will take in the next five minutes. The only certainty is uncertainty, and this is how it will be for the next couple of sessions unfortunately.
Oil: Strategic reserves & Iranian oil could help ease prices
The direct impact of the Ukrainian crisis to US equities could be limited, but the indirect impact, which is the rising energy prices could take a severe toll. This is why the war’s biggest threat to the American companies is inflation.
The barrel of US crude traded above the $100 mark yesterday then eased back to around $96 as Joe Biden said the US will release its strategic oil reserves to ease the pressure at the pump. If there is an ideal time to use the strategic reserves, it’s now!
Also, there is increased possibility of a nuclear deal with Iran to unlock the Iranian oil potential – which would provide up to 800’000 barrels of additional supply per day. That could help easing the energy crisis and pull the energy prices lower, yet the easing impact could remain limited as long as the OPEC+ constraints supply and the post-pandemic demand quickly absorbs the available reserves.
