- It’s Complicated
- Hardest for Europe to Wield
- Russia Sanctions
- Putin Huddles With Tycoons and Promises Banks Bulk of State Aid
- Bitcoin Donations
- ‘The Sky’s the Limit’
- A Key Inflation Gauge Is Still Rising
- Fed Officials Signal March Rate hike
- Airline Industry Shifts Attention
- Beyond Meat Shares Tumble
- 1MDB Loot Wasn’t Enough
Financial markets went on a roller-coaster ride on Thursday as traders monitored the latest happenings in Ukraine, where Russia used air, land and naval forces for an invasion that shocked the world. WTI crude oil surged to more than $100 a barrel for the first time since 2014, before dropping back to trade near the $90 level. The Nasdaq Composite even briefly went into a bear market, before turning a 3.5% intraday loss into a gain of 3.3%. Stock index futures are on the back foot again this morning, with Dow, S&P 500 and Nasdaq all off by 0.8% in early morning action.
Buy the dip: Many players have touted this market maxim since the COVID pandemic, when a steep selloff was followed by an unprecedented amount of buying that sent indices to continuous record highs. Since then, investors have been on the hunt for bargains, or so-called oversold conditions, while algo trading has magnified the sentiment and contributed to big reversals. Wells Fargo's Paul Christopher is warning that there is still "too much uncertainty" out there, but a question-and-answer session at President Biden's press conference helped calm some nerves.
"First of all, there's no doubt that when a major nuclear power attacks and invades another country that the world is going to respond and markets are going to respond all over the world," Biden said from the White House. "The notion that this is going to last for a long time is highly unlikely, as long as we continue to stay resolved in imposing the sanctions we're going to impose on Russia. We have purposely designed these sanctions to maximize a long-term impact on Russia and to minimize the impact on the United States and our allies."
Outlook: Western intelligence officials say Kyiv could fall to Russian forces in the coming hours. Ukraine's air defenses have been mostly eliminated and the Russian military controls several airfields that it could use to transport more troops into the country. The end-game for Vladimir Putin would be to install a puppet regime in Kyiv, though Ukrainian President Volodymyr Zelenskyy has promised to defend his nation, saying that he and his government will remain in the capital. (6 comments)
In response to the Russian invasion of Ukraine, a raft of sanctions were announced yesterday by the U.S., EU and other western powers. President Biden cut off Sberbank (OTCPK:SBRCY), Russia's biggest lender, from the U.S. financial system, along with four other banks that represent an estimated $1T in assets. He also announced export restrictions on semiconductors and aircraft parts, a swath of measures on Russia's elites (like freezing their American assets), as well as hampering Russia's ability to do business in foreign currencies and clear dollar trades on Wall Street.
Missing from the list? Sanctions on Russian energy exports or aluminum supplies, and what would be the most severe action to date: banning Russia from international payments system SWIFT. The Belgian financial messaging platform links more than 11,000 financial institutions, keeping track and facilitating trillions of dollars worth of cross-border transactions each day (Russia accounted for 1.5% of the transactions on the system in 2020).
Payments are possible without the system, but the workarounds are difficult and could have knock-on effects across the global economy. For example, while the U.K. is all in for a ban, Germany is highly concerned about reciprocal damage due to its hefty natural gas imports from Russia via SWIFT. Other nations in the EU are also concerned, and the effort would need to be coordinated to be applied effectively. "It is always an option," Biden noted in his remarks. "But right now, that's not the position that the rest of Europe wishes to take."
Thought bubble: Disagreements on whether to oust a country from SWIFT have happened before. The most recent case occurred in 2018, when the Trump administration sought to cut off the access of Iran (Europe eventually went along with the ban due to fears of being in violation of sanctions against the country). In terms of a SWIFT ban on Russia, its effectiveness is debated among economists. Some say it's an overhyped tool that could backfire or result in stronger ties with China, while others say it has the potential to shrink Russia's GDP by as much as 5%. (33 comments)
Commodity prices continue to be on watch amid supply concerns over the crisis in Ukraine. The country, along with Russia, accounts for a third of the world's wheat exports, a fifth of its corn trade and nearly 80% of sunflower oil production. Prolonged tensions could risk significant shipments from Black Sea ports, as well as production and transportation within the countries.
Snapshot: Wheat prices have already risen by more than 20% since the start of the year, while corn costs have climbed 15% YTD. That didn't stop prices from skyrocketing on Thursday, with wheat futures (W_1:COM) hitting their highest levels in nearly 14 years and corn (C_1:COM) hovering near an eight-month peak. The conflict is threatening to disrupt the cost of raw materials and food globally as inflation plagues economies around the globe.
"There is going to be a lot of volatility until Russia decides what it's going to do," noted Jack Scoville of the Price Futures Group in Chicago, "but I think a lot of the emotion was spent [on Thursday]."
Go deeper: Daily price limits for wheat futures contracts on the Chicago Board of Trade will expand for today's session, according to exchange parent CME Group. Limits for soft red winter wheat and K.C. hard red winter will widen to 75 cents a bushel, after the CBOT March and May wheat contracts settled up the normal 50-cent daily maximum on Thursday. Unless wheat futures post another limit move today, the limits will return to 50 cents on Monday.
Concerns are growing over a Fed rate hike next month, given the global risks created by the conflict in Ukraine. It's a kind of Catch-22 situation, where raising rates could exacerbate disruptions to growth, while standing by could worsen inflation and pose a big threat to the economy. The central bank will need to tread carefully in the coming months and year, and the risk of a policy mistake has never being higher.
Fedspeak: A slate of central bank officials stuck to the idea of a rate hike for March despite the uncertainty over Russia's invasion of Ukraine. Federal Reserve Governor Christopher Waller even suggested a half-point move if inflation data keeps coming in hot, as well as shrinking the Fed's balance sheet no later than July. Many traders also see the start of a hiking cycle in March, but are still debating how aggressive the Fed will be over the rest of the year.
"We haven't even completely absorbed and exited the supply shock from the pandemic yet," added Joe Brusuelas, chief economist at economics advisory firm RSM US.
Analyst commentary: "We have not had such a large and broader based overshoot of inflation in decades," declared Bruce Kasman, chief global economist for J.P. Morgan. While the bank expects inflation will begin to recede by the middle of the year, a sustained shock could push price pressures higher. "If that happens, the Fed is going to have some very difficult choices.”
In Asia, Japan +2%. Hong Kong -0.6%. China +0.6%. India +2.4%.
In Europe, at midday, London +2.1%. Paris +1.6%. Frankfurt +1.4%.
Futures at 6:20, Dow -0.8%. S&P -0.8%. Nasdaq -0.8%. Crude -0.7% $92.15. Gold -1% to $1906.30. Bitcoin +9.5% to $38558.
Ten-year Treasury Yield -1 bps to 1.96%
Today's Economic Calendar
What else is happening...
U.S. jobless claims drop to their lowest level since the 1970s.