Foreign exchange rates, treasury yields, swing as the global financial markets were reportedly rattled last week after Russian President Vladimir Putin launched a broad military offensive targeting Ukraine. Most dollar denominted assets adjusted due to the unexpected event.
The attack came as a surprise and took place on multiple fronts, prompting Western leaders to threaten to impose further sanctions on Russia in the coming hours or days. These will have grave consequences for the financial markets and the economy, Moody’s said in a commentary.
The incursion which the EU tagged as an unnecessary provocation against the sovereign identity of Ukraine has recorded significant casualties, death as global leaders seek to cut off Russian from SWIFT Payments.
The US Treasury’s 7-year auction hit a high yield of 1.905% on Thursday, up from the 1.769% high in the previous auction. The bid to cover ratio for the auction was 2.36, unchanged from the previous auction.
Dealers represented 55.5% of the bids, with direct bidders at 13.79% and indirect bidders at 30.71%. For takedown, dealers took 12.32%, with direct bidders at 23.82% and indirects were awarded 63.85%.
For S&P Global, the conflict between Russia and Ukraine could push credit rating downgrades across the board, with some implications still difficult to estimate, Reuters reported Friday, citing a report by the compamu.
The credit rating agency said it will keep track of the credit situation and decide on rating actions accordingly. S&P added that it still cannot quantify the impact of sanctions on Russia and its banks but it expects it to be “meaningful.”
The Russian central bank raised the limit on foreign exchange swap operations in euros to 3.5 billion euros ($3.94 billion). The decision to increase the limit from 2 billion euros was made in an effort to increase liquidity supply after US sanctions hit the Russian banking sector, Reuters reported Friday.
Moody’s analyst said the scale of the economic disruption will depend on the extent of the sanctions, which could range from export bans—most notably in energy and commodities markets— to Russia being cut off from the SWIFT global interbank payments system.
Although Ukraine and Russia will be hit the hardest, most global economies will feel the pain. The per-barrel price of Brent crude has already surged more than 6% to $102.85, the first time it has breached the $100 mark since 2014.
The price of U.S. WTI crude rose by almost 6% to $97.47. Most shocking was the jump in European gas prices, which climbed by around 40% to reach €115 MWh.
Although oil and gas flow from Russia to Europe has not been disrupted yet, Western nations will likely impose further harsh sanctions on Russia, prompting a decline or eventually a full stop in gas imports from Russia.
Oil prices were already high as international futures markets rose considerably during January. The average per-barrel futures price for Brent crude was up 14.4% from December to January. Consumers’ gas prices also increased.
Although market natural gas prices actually declined in January, some companies continued to pass through higher prices to consumer electricity bills, which is not immediate.
Indeed, households’ utility contracts in much of Europe are negotiated on a fixed-price basis, and some companies managed to hike their rates only in January, with further hikes planned for coming months.
Rising oil prices will fortify Russia’s economy, but longer-term consequences of war could crimp the nation’s status as a key exporter.
Russia is the world’s third-biggest oil producer and second-biggest producer of natural gas: Almost two-thirds of Russia’s natural gas exports flow to Europe along with around half of its global oil sales.
This revenue will help Russia’s economy and compensate in part for any upcoming embargo on exports. However, the tide is turning for Europe’s dependency on Russian energy, and this could have longer-term consequences for the nation.
As part of the backlash against Russia’s actions, Germany refused to certify the Nord Stream 2 pipeline earlier this week. On Thursday, U.S. President Biden announced sanctions against the firm in charge of building the gas pipeline. Overall European sentiment has recently prioritized diversifying away from Russian-provided energy.
In the near term, higher gas and oil prices will likely push up inflation across Europe, which is already seeing record-high prices for food and energy. In the short term, Ukraine will suffer the brunt of the fallout, as activity in the country is disrupted across the board.
Meanwhile, several European nations that depend on food and industrial exports from Russia and Ukraine will also feel the squeeze. The extent to which the broader world economy will be impacted depends on the level of measures implemented by Western leaders.
It is difficult to gauge how things will evolve in the coming days, but we expect that oil and gas prices will continue to increase, and this will worsen the energy price crisis throughout Europe.
Commodity prices, especially which of aluminium, will also reach record highs, as investors fear a disruption in supplies from Russia, which is a major metal producer. Elsewhere, volatility will remain the word of the day, with stocks under pressure and money flowing to safe-havens.
Improved risk appetite and lower oil and gas prices have seen gold reverse yesterday’s surge to trade back below $1,900. This still remains a hugely uncertain environment, according to Craig Erlam, Senior Market Analyst, OANDA which will ensure gold remains well supported, even if $2,000 now looks quite the distance away.
Craig said the response to the invasion has been incredibly short-lived but analysts don’t expect volatility in the markets to suddenly subside which could continue to favour gold.
Even in the absence of major disruptions to Russian oil and gas, prices are still extremely high and will continue to contribute to sky-high inflation around the world which will also be supportive for the yellow metal.
Energy
The oil price finally broke above the US$100/bbl level yesterday, trading to levels last seen in 2014. This follows an escalation in the Russia-Ukraine situation, with Russia launching a special military operation into Ukraine.
The move in the oil market would have reflected concerns over how Western nations would react to this latest development. However, following the latest round of sanctions which do not target oil and gas exports, the market has given back a lot of the initial gains.
But the uncertainty and the risk of further sanctions is clearly turning buyers away from committing to Russian oil and this is reflected in the continued weakness in the Urals differential. There are also reports that some buyers are struggling to open letters of credit with Western banks for Russian oil. That said, there will be some buyers who would be looking to take advantage of picking up heavily discounted Urals.
The higher price environment we are seeing also suggests that we could see the US taking further action to increase supply, potentially with a further release of oil from the Strategic Petroleum Reserve. However, as we saw following the last SPR release announcement, these tend to offer only a short term solution.
The US will also likely pile on the pressure for OPEC to increase output more aggressively. These calls were largely ignored last time around, and it is difficult to see a shift in the thinking of OPEC. However, we should get more clarity about this next week as OPEC+ meet on the 2nd of March.
The move in oil markets yesterday was dwarfed by the strength seen in the European gas market. Title Transfer Facility, TTF, rallied by more than 50% to settle at EUR134/MWh. Clearly there is more concern over what retaliation we could see from Russia due to sanctions.
The main risk being that we see Russia further reducing gas flows to Europe. The rally in the market wasn’t isolated to the front end of the curve, with forward prices all the way through until March 2023 now trading above
