Russian Bear Pokes Global Markets with Ukraine Invasion

Russia's invasion of Ukraine riled global financial markets, lifting crude oil prices above $100 and sending U.S. stocks plummeting. For weeks, investors have been bracing for the final shoe to drop in the Ukraine-Russia saga, forcing traders to flee to conventional safe-haven assets, including gold and the U.S. dollar. Will markets spiral out of control now that President Vladimir Putin has followed through on his posturing, and should Americans prepare to experience higher price inflation because of the conflict?

A Market Snapshot

At the Feb. 24 opening bell, the leading benchmark indexes hemorrhaged red ink. The Dow Jones Industrial Average cratered about 800 points, the S&P 500 shed 2.31%, and the Nasdaq Composite Index lost roughly 400 points. The tech-heavy index is officially in a bear market. The Russell 2000 Index tumbled close to 2%, while the CBOE Volatility Index (VIX) – Wall Street's fear gauge – spiked 19%. Even the Treasury market could not escape the bloodbath, with the benchmark ten-year yield down eight basis points to 1.897%.

So, where did institutional and retail investors flee to during this upheaval?

The U.S. Dollar Index (DXYI), a measurement of the greenback against a basket of currencies, surged 1.17% to 97.32. Gold prices climbed above $1,960 an ounce, and silver rallied above $25 per ounce. And, of course, energy commodities spiked: West Texas Intermediate (WTI) crude oil hit $100 a barrel, Brent crude topped $104 per barrel, natural gas soared 6.5% to above $4.9 per million British thermal units (Btu), and coal added nearly 4% to $191 per ounce.

Consequences for Global Markets

Before Russia’s military escalation with its western neighbor, strategists anticipated oil prices would climb above $100. Putin’s invasion was ostensibly the catalyst to increase WTI and Brent contracts to their highest levels since 2014. Industry observers believe that these U.S. and international benchmarks could surge even more in the coming months because of transportation interruptions and the massive supply-demand imbalance.

"The global oil market is tight," Rob Thummel, a senior portfolio manager at Tortoise Capital, an energy investment firm, told Liberty Nation. “Inventories are low, global market is undersupplied as global oil demand is back to pre-COVID levels yet supply is not. OPEC+ and the U.S. oil production volumes have not returned to pre-COVID levels."

Russia is a significant player in the energy market, serving as the third-largest producer of oil and the second-largest producer of natural gas. Who imports its fossil fuels is just as important. Because Europe's oil and gas inventories are way below their five-year average, satisfying about one-fifth of consumer demand in the region, the bloc purchases 40% of oil and 30% of natural gas from Russia. Europe has also increased its Russian coal imports by 17% year-over-year – and Kremlin-owned companies recently confirmed that would be postponing deliveries, adding pressure to an already constrained market.

The U.S. relies on 10% of its oil from Russia. America is slated to be a net crude importer in 2022 for the second consecutive year after oil and gas firms slashed production in response to the coronavirus public health crisis and regulatory uncertainty emanating from the current administration. In addition, the U.S. is planning on shipping more liquid natural gas (LNG) to Europe to mitigate an energy disaster. The U.S. produces more natural gas than it consumes, but inventory levels have dropped 17% under the five-year average, Energy Information Administration (EIA) data show.

Moreover, Ukraine serves as a critical transit route for Russian exports, representing about 30% of overall gas shipments. Moscow has diminished its dependence on Kyiv this year.

Energy commodity prices are likely to sustain their bull run due to prolonged geopolitical risks. The silver lining, purports Thummel, is that "winter in Europe and North America is almost over, so natural gas demand used for heating will begin to decline, alleviating any near-term concerns about Europe running out of natural gas." It has been a brutal few months in the Northern Hemisphere, but the latest weather models used by natural gas firms suggest that weather-driven demand is expected to dissipate.

That said, a war and sanctions would still “impair U.S. and global consumers that are already dealing with the highest inflation in decades,” says Luke Tilley, the Chief Economist at Wilmington Trust. But while the focus is on energy products, Tilley noted that other commodities, including aluminum, copper, nickel, palladium, and wheat, could be significantly impacted moving forward. This is a trend that is already unfolding in worldwide markets, with prices trading at multi-year highs.

“Russia exports about 9% of global aluminum and 8% of copper,” he added in an interview with Liberty Nation. “The two countries combined export nearly 30% of the world’s wheat. Russia is also the second-largest and largest producer of potash and urea, both of which are fertilizer ingredients.”

March wheat futures advanced 5% to $9.28 per bushel on the Chicago Board of Trade (CBoT). March copper futures added 0.45% to $4.48 per pound, while April palladium futures picked up 7% to $2,610 an ounce. Three-month aluminum rallied 4.6% to an all-time high of $3,443 per ton on the London Metal Exchange (LME), and the benchmark nickel price touched a decade high of $25,625 a ton.

What About US Consumers

President Joe Biden and his administration warned that “defending freedom will have costs.” A violent incursion in Eastern Europe will substantially affect a wide array of commodity and non-commodity items. As a result, red-hot 40-year high price inflation, which had already been a serious issue plaguing the White House before the invasion, is prognosticated to remain elevated this year.

Could the events transpiring 5,600 miles away prevent the Federal Reserve from raising interest rates? The futures market had penciled in at least five rate hikes in 2022, with the first one occurring at the next Federal Open Market Committee (FOMC) policy meeting in March. A considerable portion of investors had forecast a 50-basis-point increase to the fed funds rate, but now the CME Group FedWatch Tool suggests Chair Jerome Powell and his colleagues will approve a quarter-point boost.

"The Russian invasion of the Ukraine will likely result in the Fed moving more slowly on interest rates than initially anticipated," Robert R. Johnson, CEO and Chair of Economic Index Associates, explained to Liberty Nation. But it might not entirely be because of Moscow and skyrocketing energy prices.

"While rising crude oil prices will certainly contribute to higher inflation, the Fed may have to move at a slower pace on raising interest rates because of concerns of sending the economy into a recession. The bottom line is that the Fed will still move to increase rates in an effort to combat inflation, just not as aggressively," he added.

Ipek Ozkardeskaya, a market analyst at Swissquote Bank, agrees. She opined in a note that the Eccles Building "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." Still, if the Fed had any apprehension about slowing down its quantitative tightening (QT) pursuits, "it will sure give Jerome Powell the best excuse to hold fire and soften the market expectations," she stated.

Indeed, many Wall Street and Fed banks have projected that first-quarter gross domestic product (GDP) could come in below 2%, signaling a bout of stagflation in the world’s largest economy. The war in Europe has thrown a wrench into the plans of major governments and central banks across the globe. From higher gas prices to growing food costs, U.S. consumers and their wallets are most likely going to endure more financial pain this year. But the question is: Will policymakers alter their approach to inflation?

~ Read more from Andrew Moran.