The week kicks off with soaring energy prices and decent selling pressure on European and American index futures as the Russian invasion in Ukraine and the bigger sanctions imposed on Russia take a severe toll on market sentiment.
A barrel of US crude jumped more than 5% to $100 this morning, whereas the European natural gas futures closed last Friday 50% higher.
Could OPEC help? Yes, but it will probably choose not to. About two years ago, OPEC countries had refused to restrict production as a response to the pandemic, sending the price of a barrel all the way down to minus $40. There is no guarantee that they don’t do the opposite move this week and announce they won’t raise production in the face of the Ukrainian crisis and send the energy prices soaring. Therefore, the risks to the energy markets remain tilted to the upside.
Business versus ethics
The British BP (LON:BP) has given the most drastic response among the Western companies to the Russian invasion by selling near 20% stake in the Russian oil giant Rosneft (LON:ROSNq). It’s a huge deal as the two companies have worked closely together for thirty years and Rosneft stands for about half of BP's oil and gas reserves and a third of its production. Divesting a near 20% stake will result in charges of up to $25 billion, according to the company, which hasn’t yet given details on how it plans to detach itself from such a close tie.
The latest news will probably be a decent blow to BP’s share price and jeopardize the latest gains due to the soaring energy prices.
The BP news also raises questions on how the other oil giants will react to the Ukrainian calamity. Will other oil companies like TotalEnergies (LON:TTEF) or Shell (LON:RDSa) dare make similar moves?
The Ukraine war comes as a big and unexpected threat to the energy exposure, which was one of the best inflation hedges until last Thursday, but it’s no longer a safe place.
SWIFT headache
SWIFT is the messaging system of international transactions and being left outside SWIFT complicates the overseas transactions terribly. It doesn’t block them, but it makes them chaotic and unreliable. It’s like going to a restaurant and not being able to order the food you want.
The sanctions increase the risk of insolvency of big Russian banks and the risk of a bank run in Russia.
More importantly, the Russian central bank is also concerned with Western sanctions which will greatly weaken its ability to manage the war, the crisis, and the financial stability.
Russian markets will again be under huge selling pressure, and dollarization will be the next chapter in Russia. The Ruble has already been smashed by near 30% this morning to a record low, and there are hints that this could extend to 175-200 range. This means that this needless and compulsive Ukrainian war will become hard for Russia to finance.
According to the latest news, Russians are surprised and frustrated by how strong the Ukrainians resist to protect their home. The two countries will talk today at the Belarus border, but the expectations are pessimistic.
Markets
The US dollar is set for another strong session, and if we don’t see the tensions de-escalate, the dollar index could well advance toward the 100 mark.
The US index futures kicked off the week in the negative. Any hopeful news could change the negative sentiment within minutes and send the international stock markets rallying. But the chance of seeing diplomatic progress is rather slim.
The softening Fed expectations due to the Ukrainian war could revive the tech bulls, as the Fed could abandon its back-to-back rate hike plans, as the war will take a severe toll on the global economic recovery and the Fed may need to accept higher inflation to give the support the economy needs. Powell will testify before the American policymakers this week, and investors will try to catch any hint on how the Ukrainian war may re-shape the FOMC’s plans regarding the US monetary policy.