Russia launched a full-scale invasion of Ukraine as Russian troops landed in Odessa while others crossed the border into Kharkiv. There are attacks against 10 Ukrainian regions and The Guardian reported that there have been at least seven powerful airstrikes near an airport outside Kyiv where Ukraine’s military fighter bombers are kept.
The situation evolves extremely fast and operations of different kinds are reported. Air raid sirens are sounding in the capital Kyiv and Zelensky calls for martial law in national address.
It’s panic in the markets. The S&P500 futures are down by almost 2%, the Nasdaq 100 futures slipped 2.5% and the DAX and Eurostoxx futures lost near 4% this morning. FTSE futures are down more than 2%, but the British blue-chip index should outperform its European and American peers due to its high commodity exposure.
In commodities, the European natural gas futures are already up 10%. Brent crude spiked above the $101 per barrel this morning, as US crude jumped past the $98 mark. Gold flirts with the $1950 per ounce and the bulls are already to target a further advance toward the $2000 threshold.
US Corn futures are up more than 4%, US Wheat futures are up more than 5%, as Russia is the world’s largest grain wheat exporter. Oat futures, soybean futures, silver, platinum, palladium, all move higher this morning except for sugar, cotton, orange juice and live cattle.
At this point, it’s impossible to bet on any scenario. We can only monitor closely the latest developments and stand ready for more volatility. The VIX index is around the 30 level and should spike higher within the next couple of hours.
The combined revenue exposure of the S&P500 to Russia and Ukraine is only about 1%. It’s not much. Yet, the rising energy and commodity prices are a growing threat for the US equities as they will put further upside pressure on inflation and force the Federal Reserve’s (Fed) hand to act more aggressively to tame the inflation.
But on the other hand, could the Fed go full blast into an aggressive policy normalization while a war is taking a severe toll on global growth and the economic recovery? Not so sure. It will sure give Jerome Powell the best excuse to hold fire and soften the market expectations.
Activity on fed funds futures now tells us that the probability of a 50bp hike is no more than around 10% this morning. Of course, the heightened demand in US sovereigns as a safe haven play explains most of the price action on the US papers, yet the Fed should also take into account that there is a war disruption to the global economy and tightening policy too fast may not be a good idea, even with the skyrocketing inflation.
Rising energy prices are also a big headache for Europe, as 40% of Europe’s natural gas and 30% of its oil supplies come from Russia. Yesterday, the data confirmed that inflation in the Eurozone advanced to 5.1% in January, and the February numbers will be even more scary. Yet, the ECB cannot do much about it right now, as the geopolitical tensions could take a severe toll on the economy and the economy needs the ECB’s support.
In FX, the US dollar index is trending higher this morning and the US dollar is certainly a ‘safe’ tactical currency play as the Ukrainian tensions escalate.
One place that’s not safe is Bitcoin, as the coin has been very vulnerable to both the hawkish Fed expectations and the geopolitical tensions. If the situation in Ukraine worsens, we could see the price of a coin fall toward $30K and even below, depending on how bad the situation is. The other cryptocurrencies will also feel the pinch of the Ukrainian war. Remember, when Bitcoin sneezes, all the crypto-industry catches cold. There is also the fact that higher energy prices make crypto mining more expensive. So that’s also a fundamental reason that prevents Bitcoin from being a safe-haven asset in the actual environment.