This Week In Markets: 28th Feb - 4th Mar 2022 (Russia/Ukraine, SWIFT, Oil, OPEC Update)

Okay, it is Sunday the 27th of February. Hope you're doing well. And of course, just one real dominant theme to update you on, and of course that is Russia and Ukraine situation. So I'm going to run through that, get you up to speed. I've basically amalgamated all of the major headlines that have developed over the weekend, so I'm going to talk about just generally an update of where we're at at the moment in terms of the the military engagement side of things. We're then going to talk about the swift action that's taken place by the ruling on Saturday, and what is it, what does it mean going further forward. We're then going to talk about OPEC and also oil prices. But before we begin, I guess, and before we talk about the rest of the week, because it is actually really busy in terms of economic data, because of course bookended with non-farm payrolls, meaning that we get the likes of the ISM manufacturing, non-manufacturing, ADP, the regular jobless claims. We've got factory orders coming out of the States. So really another busy week ahead for, for general markets. But looking at the market open, I have been waiting for markets to open so I could get a much better representation of how things have opened for electronic trade at least. And as you can see here, just cycling through a couple of charts, top left-hand corner you can see EURUSD and cable have gapped significantly lower. So I'm looking at the futures market here, and that indicative then of further flight to quality into the US and we'll talk about how the SWIFT movement could help accelerate that move. So cable consequently also lower. Irrespective of dollar strength, gold also taking a bit of a pop on the upside on the recommencement of trade. That's hard to see, but actually it's trading here at $1,921, having closed at around $1,890 at the close on Friday on COMEX futures on Globex. So we're up about $33 there. Initially did ride up higher to around a $50 gain at the open. In terms of the major US indices, the Dow opened down about 500 points, NASDAQ 400, the S&P 100. WTI crude has popped up around $6, briefly touching $99 after hitting highs just over $100, of course, on the actual invasion when that happened last Thursday. And in terms of the US 10-year, we've had a bit of a pop on the reopening here, just testing up at some of the highs that we saw towards the second half of last week. So what exactly is happening? Well, running you through the headlines, here's a map of, of the locations of Russian control and attacks. So officials from Kyiv, the latest has been today that they're going to meet Russian counterparts at the Belarusian border, so up here. And this comes hours after Vladimir Putin had put Russia's nuclear forces on higher alert. And so this latest development comes even as fighting has continued inside Ukraine, with heavy fighting reported over the weekend in the second largest city of Kharkiv. Most geopolitical kind of strategists that I've been reading at the weekend were talking about this idea that the kind of endgame of Putin is, as we know, there's large military and naval capability coming out of the Crimean Peninsula, which of course was annexed by Russia back in 2014. They're looking to come up from the south and kind of a three-pronged effect coming east with this Russian separatists on that side, given what had happened already several years ago, and then coming from the north over the border south from Belarus. And so here the endgame believed to be for Putin then to kind of neutralize the government in Kyiv here, but to take control more so of, of the land grab on the eastern side. To expand upon what they did back in 2014. We'll talk about that a little bit more in a moment, and, and also China's involvement and what could that mean going further forward. But in terms of things to be aware of, the European Union foreign affairs ministers, they met today and they approved sending joint military aid to Ukraine, according to officials familiar with the matter. And Russia's military has deployed now what is said to be about two-thirds of its forces around Ukraine to the conflict so far. A senior US defense official has said that Russian forces now are about 30 kilometers, so just under 20 miles, outside of the center of Kyiv at this particular point in time. However, of course, at the time I say this, it's going to be out of date, so just keep that in mind. Then the other thing, um, in terms of the calendar, G7 finance ministers and central bank heads they're going to hold talks tomorrow on Tuesday with humanitarian aid for Ukraine likely to be the main topic. But of course, we're keeping a close eye on that given all the major central bank as well as G7 finance ministers in attendance. So let's just run through some of these, these headlines. So as I just said, Ukraine to hold talks with Russia on the border of Belarus. Ukraine to meet without conditions as Putin demands neutrality. Most people are probably of the belief that there's not likely to be any immediate solutions on the back of these latest talks. But nonetheless, they are believed to be going ahead. And of course, comes in the context of, well, of Vladimir Putin kind of upping the ante with some of the nuclear talk that he's been throwing around this weekend. One of the things here is about China as well. And China, as we know from last week, have been very uncommitted in condemning, much like much of the Western world has done, about the course of action that Putin has taken with the forceful incursions into Ukraine. But one of the things here to be aware of is the longer-term relationship. It was only a couple of weeks ago that actually Russia and China signed a top-level agreement on many different things, particularly to do with trade over the long term. And of course, this is looking at a map here. What I have is the, the Belt and Road Initiative. This, of course, is the global infrastructure network which China is trying to achieve, with the global dominance of becoming the major superpower in the world. And although this is a long-term ambition, of course, it does explain to a certain degree the relationship and stance that they have with Russia. So if we just zoom in here a little bit, you can see this is, um, the UK, Western Europe, and you can see Ukraine situated here. And you have what is the existing railroad system that goes through large pockets of, of Russia, through Moscow, and then going into Western Europe. And you can see here, these are the proposed in the pink line. So going through and these would be countries which you can then start to read between the lines of some of the geopolitical relationships and how they will side on certain issues, because here you've got countries like Iran as well as Russia, and then you've got Turkey as well, all involved. And these are kind of hotbeds of geopolitical tension between those aforementioned countries, namely, and that of the West. And here, one of the main things you can see is an economic corridor that runs from north to south, linking essentially the railroad networks coming through from both east to west but from north to south. And hence the reason why, for China, actually Ukraine is quite important. And we know why, because for many things, particularly soft agricultural goods like wheat, um, they're particularly important, of course. And so looking to secure and make safe the relationships with Russia, but also not looking to comment in a way that is going to jeopardize that, because they know that they need to be on side with them as much as well as not stoking and further confrontation with the US over ongoing matters that they're already having as well in that ongoing trade war. So yeah, just a bit of added color on the geopolitical front. One of the major things over the weekend, though, and something that I guess needs to be talked about a lot more because it might be something that you are not completely familiar with what exactly it is, but a decision to penalize Russia's central bank and exclude some Russian banks from the SWIFT messaging system. That's the Society for Worldwide Interbank Financial Telecommunications, otherwise known as SWIFT, and it's used for trillions of dollars worth of transactions around the world. And it was announced on Saturday in a joint statement by the US, the European Commission, France, Germany, Italy, the UK, and Canada. The agreement includes measures to prevent the Russian central bank from deploying its international reserves to undermine sanctions. So this is something which our head of trading, Piers, was talking about. If you listen to the podcast that he put out on Friday, and this is super important because to give it a bit of context, Russia is ranked 13th globally in all SWIFT messages and 6th on payment messages. Out of 291 Russian SWIFT members, they collectively send an estimated $800 billion worth of payments a year, and that's equal to over 50% of all of Russia's GDP. So this is really upping, it's escalating the intensification of these sanctions at this point in time. At least 10 oil and commodity traders who spoke to Reuters on condition of remaining anonymous, I read today, said that flows of Russian commodities to the West would be severely disrupted or even halted for days, if not weeks, until clarity is established on these exemptions. So in order to be able to shift communication over to other, other forms, that's going to take a bit of time. And of course, disruptions in the interim period. And so oil's gapped up here about $6 initially at the open. But it's definitely something you've got to keep an eye on throughout the week. And the biggest thing, of course, here is about sanctions more to do specifically with energy and the retaliatory effect that that could have from Putin and Russia. The move— the SWIFT move is aimed at Russian banks that have already been sanctioned. So it's not kind of ironclad on the exact details here in numbers. As I mentioned, there's 291-odd Russian SWIFT members, but actually the move that's happened over the weekend is aimed at Russian banks that have already been sanctioned by the international community, but could be expanded to the Russian— other financial institutions if necessary. The move does include though Sberbank, VTB Group, which collectively account for about half of the country's banking assets. They are the big ones, so the others much smaller. So in a sense, this is severe of what they've done. with these Western powers with this latest swift move. To give you an idea as well, Russia still holds about $300 billion of foreign currency offshore, enough to disrupt money markets if it is frozen by sanctions or moves suddenly to avoid them, according to analysts at Credit Suisse. One official said the White House is looking at exemptions for transactions involving the energy sector which the US administration has sought to exclude to prevent oil prices from surging. Remember, no one wants surging oil prices here. The point being is, is the fact that from a US perspective, they're suffering from multi-decade high inflationary conditions at the moment. That's a killer for Biden at the moment going into the midterms. Consumers are really feeling that at the moment stateside. And so another massive flush and push in energy prices is only going to accelerate north further direction of travel of inflation in the US. And likelihood the Fed action, which could then subsequently tip the US economy into recession, that probability could tick up certainly under those, those conditions. So this is the, the careful kind of thing that, that Western powers now need to tentatively kind of navigate this week. And of course, the retaliatory effects coming out of Russia is going to be one of the key things to look at. If Russian Russia does do anything with the supply of their gas or their oil, you're going to see big moves in crude oil futures going further forward. A couple of other things to, to mention. Um, one is here, I'm going to talk about oil prices for a second, and I'm going to start with this one. This is the UK, and actually the Business Secretary in the UK, uh, Kwarteng is considering using oil from the UK's strategic reserve in an effort to stabilize energy prices, according to people familiar with the government's thinking. Came out just a few hours ago today on Sunday. Apparently, uh, Kwarteng has spoken to counterparts in the US, Germany, France, and Canada about a coordinated move. The UK ministers will hold a video conference call with the Energy Commissioner, uh, Kadri Simpson, on Monday. So looking out for that in a few hours' time. As a guide, EU states, EU member states are required to hold oil stocks at the higher of 90 days of average net daily imports or 61 days of average daily inland consumption in order to mitigate any supply crises. Now, they did coordinate, if you remember, back when COVID was happening, an intervention on behalf of the Americans who definitely tapped for a much larger size. I think it was 50 million at the time. That was in coordination with the UK and others. And of course, last week we heard that the US is thinking about the same thing again. So this doesn't come as a massive surprise. And again, it's trying to front run what in the UK could be hugely problematic inflation issues, given the predominant fact that we still got probably another 2 or 3 percentage points to run until we hit the peak of what's forecasted at the moment for UK CPI. And the fact that we've got those energy price caps coming in, um, in I think April, which is going to substantially add to that upside. And so further now disruption to oil is only going to further heat that up. And so could they intervene in the time being and release some oil? I think Britain released 1.5 million barrels last time. In context, the US did 50, so much smaller. A few other things though to be aware of The US, what have they said? They have said they're keeping energy sanctions against Russia, quote, on the table, though any measures would have to avoid disrupting markets and pain for US consumers. So somewhat contradictory, I'd say. I don't think you can do one without doing the other. So them saying that energy sanctions are on the table, but they don't want to hurt the consumer. Well, it's going to hurt the consumer. So either consumer feels the pain or you don't. Put on any energy sanctions. That's the kind of final big bullet in the chamber to look out for this week, as I've mentioned a few times. Um, some other things to be aware of: we do have an OPEC meeting this week, of course, beginning of the month. We're going into March now, if you can believe it. And so that means they then set the policy for the following month. And what can we expect given all the oil volatility that we've seen? Well, OPEC will probably, according to analysts at Bloomberg who've written over the weekend, stick to their plan of only gradually increasing oil production when it meets. The anticipated then is to continue on with the increase of supply of some 400,000 barrels per day, according to several delegates that were cited, uh, cited, excuse me, even after the invasion of Ukraine has sent prices surging. One thing I would bear in mind is the meeting is happening on Wednesday, it's Sunday, and so as we saw last week, the world can change in a matter of days. So although that's the general expectation, that's fine for now, But just, just keep your, your finger on the pulse, I guess, and see and reevaluate when that meeting comes around. Saudi Arabia, they're likely to decide on a unilateral raise in production beyond its quota, according to delegates. Such a move could create a rift with Russia and possibly cause the OPEC alliance to unravel. So, yeah, it's interesting. I think Saudi Arabia, I think Kuwait as well, still have a degree of some spare capacity to increase production a little bit more. So they could offset the price a touch. And particularly Saudi Arabia, conscious of keeping strong relationships with the likes of the US, particularly with rising tensions in nearby regions and so forth, given the lack of military presence that Saudi have, and hence the relationship with America. But do they jeopardize then the fragile relationship with Russia? Because without then Russia being involved in any type of supply pact, the whole OPEC+ group breaks and the whole control over oil prices is broken. So Saudi Arabia will be very conscious of that. Um, the other thing that has happened from an oil perspective is this: BP, the UK British Petroleum, they've moved to dump its shares in oil giant Rosneft, taking a financial hit as much as 25 $1.5 billion by joining the campaign to obviously isolate Russian companies and assets and their economy. And BP didn't say whether it was planning to sell its roughly 20% stake in Rosneft or simply walk away. Any potential buyer, one caveat, would have to navigate a tightening web of economic sanctions that would make any transaction obviously incredibly difficult. But what they've said is, I think it's in the third quarter BP would realize this hit. So keep an eye on BP shares as well at the FTSE cash open on the, on the LSE later on Monday morning. They could be definitely one to watch. And then on the back of, to kind of wrap up the, um, what we've been talking about with, with Russia is gold prices. Um, gold has, has gapped up about $30 here at the open. We're well over $1,900 again in gold futures, and The latest here is that the Bank of Russia has said it will start purchasing gold again after a 2-year hiatus. They were adding gold reserves very sharply while they were decreasing their Treasury holdings, looking to stay away from holding US-based assets, and they were pivoting into the yellow metal. They kind of stopped during the period of COVID and they've recommenced. To give you an idea, Russia had more than 2,000 tons of gold at the end of December. Of '21, according to data from the IMF, accounting for just over 20% of its reserves. So being holding gold, it's the 5th biggest sovereign gold owner on a global basis, to give you some context. Okay, other than that, it is a super busy week, Russia-Ukraine aside, which of course will be the dominating factor for sentiment and and direction. But a few things to contemplate, just to run through them briefly. Monday, you've got the Chicago PMI number coming out, and then you've got US ISM Manufacturing PMI coming on Tuesday, which is likely to rebound according to most analysts. You can see here looking for an uptick on the headline figure because of the fact that now we're over the Omicron wave that we saw really in January and early February that impacted the United States. So expecting those numbers to go up. We do also have from a Fed communication point of view, which ultimately is super key at the moment because we're still trying to determine what it is, not only what they're going to do in March about this 50 basis point or not, but also the subsequent hikes thereafter. And we get the dot plot coming out with the latest summary of economic projections on the meeting in mid-March, which is going to be key, of course. But Fed Chair Jerome Powell appears both before the House on Wednesday and the Senate on Thursday, banking panels he's addressing, and might sound, you could argue, more cautious than usual given the hawkish pivot that they've made, just in the context of the latest geopolitical developments, which would make sense. And if that does happen, do you then get at that point in the week— we're talking midweek— a little bit of a relief rally, this idea of not excessive tightening The idea here, though, is really what happens to energy prices, because it might then mean that the Fed doesn't really have a choice to tackle just rampant inflation if oil prices on the worst case really rocket higher, energy prices in general. Other things to look out for this week. You've got US ADP national employment figure. We're looking at a bounce back to a positive 500 reading after the shock drop of 301,000. Again, the spread of the Omicron coronavirus variant hurt the jobs market that particular month, so we expect in the spring back now given the sharp drop and decline that we've seen in COVID cases in the US and, and the big pickup. We're looking for a predominant bounce back in services, hospitality, these types of leisure industry jobs in the US, and this will probably mimic as well in the case of the labor report that we'll get on Friday. The Bank of Canada also has a rate decision. Analysts here at ING and others are expecting a 25 basis point rate hike after they put that off at the beginning of the, of the year. The economy now is suggesting that that looks pretty much an assured thing and would probably then trigger then multiple rate hikes to come in a similar fashion to what markets are expecting from the Fed. Thursday you've got your weekly jobless claims, you've also got factory orders and ISM non-manufacturing and the Beige Book all coming out the States and then bookended with non-farm payrolls. Set to show another decent increase in employment. The unemployment rate expected to fall back to 3.9%, with average hourly earnings rising at 5.7% on an annual basis. So, yeah, really busy stacked calendar from economic data points of view. Jerome Powell in front of the House and the Senate as well. But most importantly, of course, is going to be monitoring these developments pertaining to Russia and Ukraine. Where does it go from here? So that's it. Good luck for the week. Um, I'll put out any breaking videos through the week should something substantial happen on the Ukrainian front. Otherwise, take care of yourself and have a good week ahead.