Risk sentiment weakens as Joe Biden meets the EU leaders today. They are expected to announce new sanctions against Russia in the coming hours. There is a possibility of a ban on Russian oil imports to Europe.
One of the biggest worries – to lose the Russian gas which stands for 40% of European gas imports, has partially eased after Qatar agreed to supply gas to Europe, but the latter agreement is a long-term solution and the weaning from the Russian oil won’t be immediate. Therefore, Germany and Hungary are not necessarily in for a Russian energy ban. But in reality, that’s The Step that needs to be taken if Europe wants Russia to get hurt enough to ease the intensity of its attack on Ukraine.
Uncertainties about Russian oil injects volatility in oil trading. We see decent positive and negative swings, but the bulls have the upper hand. The barrel of US crude consolidates near $115pb this morning, and the positive pressure is here to stay until there is more clarity regarding the new sanctions. If Europe decides to walk away from the Russian oil, we will certainly see another leg up in oil prices – although a part of such risk is certainly already priced in. And if not, we shall see oil return toward the $100pb level. Yet, the tight supply and rising demand in global oil market will certainly throw a floor under any short-term price pullback. The 50-DMA is the major support to the actual rally, and stands a touch below the $98 mark presently.
Major Russian shares start trading
Russian market partially opens today, after but only circa 30 Russian company shares will be allowed to trade for a shortened four-hour session if the trading doesn’t stop due to a move above 15% within the session, including the influential names such as Gazprom or Sberbank.
Foreigners won’t be allowed to sell their stake until April 1st, and short-selling will be banned. And because most of the market was made up of international investors, we will not get a clear picture of the valuations immediately.
Plus, Russia will likely support the price action to temper the first day volatility, yet the medium-term outlook is gloomy. In fact, Gazprom and Sberbank lost more than 99% of their value in London trading after the invasion began.
Putin wants Rubles!
Putin now demands rubles in exchange of its natural gas supply in an attempt to support the falling ruble and to reduce the risk of holding foreign currencies as sanctions become heavier to stand.
The dollar-ruble is back below the 100 mark after having come closer to 140 level in the first days of invasion. The latest move could help throw a floor under the ruble’s short-term depreciation as it will increase demand in rubles significantly. In fact, the Europeans pay $285 million every day to buy the Russian oil alone.
But, if Europeans decide to walk away from the Russian oil, the impact of the latest move will be lessened. Will they have the guts to do so? It’s just a question of how far both parties are willing to go in terms of using their economic or military power.
In the FX
With the escalating tensions into today’s Europe – Biden meeting, the dollar firmed against major peers. The EURUSD slipped below the 1.10 mark again, as the European addition of Russian oil could cost the continent a lot in terms of inflation and economic growth. The sharp rise in energy costs and potential supply disruptions will also force the European Central Bank’s (ECB) hand to become more aggressively hawkish to avoid an overheating inflation in the zone, as inflation – at the current levels could no longer be ignored. the winds could rapidly change direction in the actual environment of high geopolitical uncertainties. For now, investors don’t have the courage to buy the DAX past the 14500 mark.
And oh, the EU is also expected to unveil new legislation, as soon as today, to curb the market power of companies that are worth at least 75 billion euros and that run one core platform service and have 45000 active users. So the US giants like Google and Amazon are obviously the main target, but there are some European companies such as the Dutch booking.com, that could feel the pinch of new rules, along with the prospects of rising inflation and tighter monetary policies.
So what do investors do in surging inflation environment? Mohammad El-Erian advises cutting equity exposures due to the mounting risk of stagflation – which is the combination of high inflation and slow growth / or high unemployment that would come along with it. UBS likes hedging portfolios with energy and commodity stocks, while BNP says shorting 10-year treasury futures could be a good hedge against soaring inflation, given that the rising inflation will boost the Fed tightening which will, at some point, involve balance sheet reduction and a higher downside pressure on treasuries.
So speaking of treasuries, we saw yesterday a much-needed easing in the treasury selloff, though the outlook for treasuries remain bearish, which means that the yields should keep rising. The US 10-year yield
Gold tests the $1950 offers, and there is potential for a further advance as uncertainties loom and the market lacks a clear direction, or lacks a clear explanation of why it bounced back so sharply. I believe there is still the possibility of a rebound toward the $2000 mark. The steep rise in US yields is of course a turn off for investors in the absence of clear loss of appetite, but if things are to get uglier, gold is a good refuge.
