The intensifying fighting in Ukraine and the inability to make diplomatic progress have caused Europe’s markets to experience their worst week since October 2020. On Friday, the shelling of Zaporozhia’s Ukrainian nuclear power station in Zaporizhia, which is the largest in Europe, shattered hopes of stabilization and clearly revived risk aversion. As new geopolitical announcements make themselves, volatility is expected to increase.
Although no one knows how long the conflict in Ukraine will continue, one thing is sure: it is a significant source of macroeconomic instability. We’ve already discussed commodities in a broad sense. We can also add the dollar to the mix in a risk aversion move, driving the euro down to USD 1.0936. The physical distance between the United States and the Ukrainian theater added to the traditional safe-haven effect.
Key Drivers & Actionable Takeaways 3-07
TIP – This is a brief bullet-point summary. It is a tool that gives investors and financial a fast and simple list of what to watch for and talking points for the week.
- Ukraine Conflict
- Rising Inflation & Recession Fears
- Fed Hikes & Fed Talk
- Wednesday March 9 – JOLTs Job Openings (January)
- Thursday March 10 – Core CPI (MoM) (February)
We do think there is a possibility of a ceasefire because the Russians are now stating the terms publically. Just ahead of another ceasefire this meeting, the Kremlin issued a list of demands to be accomplished if Ukraine wants the Russian invasion to be halted immediately. These include, according to the Kremlin spokesman, the recognition of Crimea as part of sovereign Russian territory, as well as Donetsk and Lugansk as independent states. Ukraine also said it was open to a non-NATO agreement if they received support from the West.
This comes after yesterday’s announcement by NATO of a “green light” for countries to give warplanes to Ukraine. We tend to think Russia is more likely to come to an agreement because they don’t have the intention of an occupying force and they get Crimea and the Eastern territories.
That being said, it is still very unknown as to the direction of the war and if any ceasefire is possible.
China Banks Help Russians
According to bank officials, the Russian branch of the Chinese State Bank in Moscow has received more requests for accounts. Reuters reported that the bank branch opened new accounts for 200-300 Russian companies in order to get around international sanctions. China is opposed to Western sanctions on Russian banks, which ban them from participating in SWIFT’s international payment system. China stated that it will continue to have normal economic and commercial relations with Russia. It also allowed China to participate in the CIPS payment system. Many Russian businesses are reportedly in the process to switch currencies from the dollar into the yuan. However, the Russian ruble fell to a record low of 17 yuan. It lost almost 40% of its value over the past week. As the Russian-Chinese financial relations develop and banks use the new payment system, it is probable that the ruble will regain a substantial portion of its value in the coming weeks.
Russian Disconnects From Internet
Russia announced that no later than March 11, all internet traffic must use domestic “domain name systems” (DNS). This would effectively remove Russia from the global internet as only “.ru” connections would be made. This announcement comes on the heels of targeted cyber disruptions to Russian media and governmental websites attributed to the Anonymous organization.
Vehicle Production Slowdown
Vehicle manufacturers are trying to adjust supply chains away from Russia’s MMC Norilsk Nickel. Currently, no Western sanctions are targeting the nickel and palladium producer, but possible future sanctions against its owners are driving prices higher.
Yellen – Sluggish Economy for “Decades”
During a speech on Friday, Treasury Secretary Janet Yellen warned that “Forecasters uniformly agree that [economic] growth over the next several decades will be sluggish.” Yellen added that aging demographics and slowing productivity are to blame. During the speech to members of the Stanford Institute for Economic Policy Research, Yellen added that she believes the Federal Reserve will tackle inflation and ensure a “soft landing” while avoiding a recession.
The exact mechanism was used in the sovereign debt market. There was an influx of US Treasury bonds demand, which led to their 10-year yield falling to 1.78%. This isn’t the only reason. The US monetary policy path is less clear than anticipated. Investors felt that Fed boss Jerome Powell was more worried than they expected about the effects of the conflict in Ukraine. They believe the central bank might not tighten as expected this year. The Bund in Europe is now back in negative territory, at -0.06%
Bond yields have continues to trend bullish due to Fed raising rates. The Ukraine War may put pressure on the Fed not to increase rates at the same pace, but most Fed watchers remain hawkish.
Financial advisors and investors should take note that the US 10YR yield went over 2% which is over the average S&P 500 dividend. Bonds are getting crushed, but we think investors will start moving out of equities into higher-paying conservative investments such as CDs.
The grim backdrop prompted a surge in digital assets after Mykhailo Fedorov, Ukraine’s Deputy Prime Minister, announced that his government would accept cryptocurrency donations to help the country face Russian aggression. According to reports, the Ukrainian government has received more than $50,000,000 in cryptocurrency asset donations. The bitcoin price was 42,000 on Friday, before falling this weekend to $3800.
Let’s not forget about oil. Russian oil is a challenging product to purchase for buyers. This mistrust creates the appearance of a self sanction, causing the Brent price to drop by almost USD 20. However, this discount is not enough to make buyers scarce. This causes the price of WTI and Brent to rise, and are currently trading at USD 112 and USD 110, respectively.
These prices make OPEC+ members (other than Russia) happy. They have decided to keep to their plan of increasing production by 400,000 barrels/day in April while avoiding the controversial topic of war in Ukraine. According to market sources, there is a possibility of an agreement on the Iranian nuclear question.
There is still panic about gas prices in Europe and Asia on the energy front. Russia is also a major exporter of coal. The prices have reached new heights with the Dutch TTF hovering at EUR 183/MWh, and the Asian benchmark (Newcastle high-quality thermal coal) at more than EUR 400/tonne.
As worries grow, the ounces of gold are slowly but surely moving towards USD 2000. The planets are aligning to support the barbaric relic. Despite the rising greenback, its price has risen to USD 1950 due to rising inflation and geopolitical frictions. The star of the precious metals market is palladium, which is nearing its historic high (closer to USD 3000). Remember, Russia is responsible for one-third of the world’s total palladium production.