The stock market scored an amazing comeback this week, initially selling off on the deteriorating Russia-Ukraine situation, then rallying on optimism that the conflict could have only a minimal impact on the U.S. economy. The S&P 500 closed the week with a 0.8% gain after falling as much as 5.5%, the Nasdaq Composite increased 1.1% after plunging as much as 7%, the Dow Jones nearly broke even after losing 5.3% midweek, and U.S. West Texas crude oil pulled back after briefly topping $100 per barrel. The turnaround came after President Biden issued targeted sanctions Thursday afternoon that did not affect Russia’s oil and gas exports or block Russia’s access to the SWIFT financial system, sparking the rebound that continued into Friday. At the same time, the shock and uncertainty of a war in Europe could discourage the Federal Reserve from being aggressive about hiking interest rates, which had been weighing on stocks before Russia’s invasion.
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%.
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 warned Kyiv could fall to Russian forces in the coming days as intense fighting continues. Ukraine’s air defenses have held up better than anticipated, although 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. (21 comments)
In response to the Russian invasion of Ukraine, a raft of sanctions was announced 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%. (65 comments)
Traders were also watching commodity prices amid supply concerns from 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.
Aluminum on Thursday topped its 2008 peak by climbing nearly 3% to $3,388 a ton in London, while gold hit its highest level in more than a year, rising 3.3% to $1971.30. Nickel also advanced 2.4% to $25,085 a metric ton on the news, palladium climbed 4.4% to $2,547 a troy ounce in New York, while wheat futures soared 5.7% to $9.35 a bushel in Chicago and corn prices rose 5.1% to $7.16.
Over in Ukraine: The National Bank of Ukraine limited cash withdrawals to 100K hryvnia a day, equivalent to about $3,339.13, and fixed the official exchange rate Activity on Ukraine’s PFTS Stock Exchange was postponed, while the yield on a Ukrainian dollar bond maturing in September 2027 doubled over the last 24 hours to 32.060%.
Over in Russia: The ruble was trading as low as 83.4572, down more than 10% versus the dollar, prompting Moscow to announce a currency intervention. Meanwhile, yields on Russian benchmark 10-year OFZ ruble bonds hit 10.93%, their highest since early 2016. Russia’s central bank also ordered brokers to ban short-selling as Russian shares plunged, with the benchmark MOEX index losing as much as 45% in early trade.
Elsewhere: The greenback, which could be viewed as a safe-haven during times of geopolitical unrest, rose 0.4% to 96.538, per the U.S. Dollar Index. In the crypto space, Bitcoin (BTC-USD) plunged 9.1% to $35,313, suggesting it is still trading in line with the riskiest of assets, before rebounding. Meanwhile, bonds caught a flight-to-safety bid, with the yield on the 10-year Treasury falling 10 basis points to 1.88%. (308 comments)
Just months after the COP26 Summit in Glasgow, topics like energy security are dominating climate action in the headlines. Germany on Tuesday halted the Nord Stream 2 pipeline – which is designed to double the amount of its gas imports – after the country made the decision to phase out nuclear power in 2011 and discontinue coal power by 2030. With Germany now relying on Russia for 55% of its gas imports, fears of an energy crisis are growing.
Quote: “Germany is right on Nordstream2. The pipeline has to be assessed in light of the security of energy supply for the whole of Europe,” tweeted European Commission President Ursula von der Leyen. “We are still too dependent on Russian gas. We have to strategically diversify our suppliers and massively invest in renewables.” Russia’s Gazprom (OTCPK:GZPFY) owns the entire Nord Stream 2 pipeline, but paid half of the $11B in development costs, with the rest coming from Shell (NYSE:SHEL), Germany’s Uniper (OTC:UNPPY) and Wintershall (OTCQX:BASFY), Austria’s OMV (OTCPK:OMVJF) and France’s Engie (OTCPK:ENGIY).
Germany’s decision to halt Nord Stream 2 “is no small joke,” said Daniel Tenengauzer, head of markets strategy at BNY Mellon, adding that the war or stricter sanctions could have a cascading effect on Germany’s manufacturing economy. President Biden likewise said he would do everything in his power to insulate American consumers from Russian sanctions, but recognized that that costs would likely rise. “Defending freedom will have costs for us as well, here at home. We need to be honest about that. I want to limit the pain the American people are feeling at the gas pump. This is critical to me.”
Go deeper: Renewed importance on energy independence could weigh on policymakers’ efforts to decrease the usage of fossil fuels, with coal imports to the EU in January climbing 56% from the prior year. The U.K. Coal Authority also recently allowed a mine in Wales to increase output by 40M tons over the next two decades, while Australia is planning to open or expand more coking coal mines. Over in the U.S., U.S. Energy Secretary Jennifer Granholm is urging American producers to raise their oil and gas output, even telling the National Petroleum Council in December to “get your rig count up.” (134 comments)
Another story that flew under the radar this week – due to Russia’s invasion of Ukraine – is that Canada managed to clear out protesters in downtown Ottawa, which had been camping out there for weeks. The “Freedom Convoy” movement, which started with truckers demonstrating against COVID vaccine requirements and restrictions, even spread to several border crossings with the U.S., including the crucial Ambassador Bridge that connects downtown Detroit with Windsor, Ontario. Prime Minister Justin Trudeau ended up invoking emergency measures to quell the protest, which gave powers such as compelling towing companies to remove trucks from designated areas.
Economic price tag? The disruption was said to cost the Canadian capital over $800K per day in policing expenses, and that does not include the collateral damage felt by businesses in the surrounding areas. It also upended U.S. cross-border trade worth $350M a day, with the auto industry alone facing losses as high as $1B, including manufacturers like Ford (NYSE:F), General Motors (NYSE:GM) and Chrysler-maker Stellantis (NYSE:STLA). While the Ambassador Bridge has been cleared, it’s going to take several weeks for things to return to normal, said Peter Nagle, auto research analyst at IHS Markit.
The Emergencies Act (which was later revoked) allowed authorities to declare certain areas as no-go protest zones, where demonstrators could be subject to arrest. “You can disagree with elected officials. You can certainly disagree with me. But you can’t harass your fellow citizens who disagree with you,” added Trudeau. “You can’t hold a city hostage. And you can’t block a critical trade corridor and deprive people of their jobs.” Others argue that the invocation of emergency powers threatens civil liberties, while their expansive nature could set a dangerous precedent for future civil protests.
More controversy: The Canadian government instructed banks to lock the private and/or business accounts of individuals involved in the weeks-long demonstration, saying it was crucial during the declared emergency period. “We were very clear that we would be following the money, that we would be using financial tools to disrupt illegal blockades and occupations,” Finance Minister Chrystia Freeland declared. “These measures were put in place to disrupt illegal activity in Canada.” While the accounts are now in the process of being unfrozen, organizers of the Freedom Convoy dubbed the move financial warfare, saying it would “sow mistrust in both the banking system and the government and the repercussions will be felt for years to come.” (105 comments)
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