Markets in turmoil over Ukraine as commodities rise, US stocks rebound
Volatility reigned as Russia’s invasion of Ukraine sparked risk aversion in equities and safe-haven demand while also boosting key commodities.
Volatility reigned supreme across global financial markets as Russia’s long-anticipated invasion of Ukraine sparked risk-aversion in equities and safe-haven demand for US dollars, government bonds and gold, while also boosting key commodities including natural gas, oil, metals and wheat.
The US sharemarket rebounded sharply on Thursday amid hopes a worsening of the energy crisis and associated inflation risks may be averted after the US did not immediately slap sanctions on Russia’s exports of energy and other commodities but pledged more oil releases from its strategic petroleum reserve, and talks continued on an Iran nuclear deal that would allow more oil into the global market.
Brent crude oil dived 7 per cent during the day after the global benchmark rose to an eight-year high of $US100.54 ($139.49) a barrel when Russia attacked Kiev. Gold reversed from an 18-month high.
Washington’s measured approach on Russian sanctions helped stabilise risk assets, with the Australian dollar reaching US72c after dipping below US71c and the S&P/ASX 200 share index consolidating after dropping 3 per cent on Thursday, its biggest one-day fall in 18 months.
But the while the Nasdaq narrowly avoided a “bear market” fall of at least 20 per cent from its peak, both the tech benchmark and the S&P 500 remained in “correction” territory – down more than 10 per cent from their peaks – and S&P 500 volatility remained elevated near 30 per cent.
Crude oil also stayed on the boil in Friday’s Asian trading, with Brent crude jumping 2.9 per cent to $US101.90 as traders considered whether oil could be dragged up by surging gas prices.
It came as Russia’s military pounded Kyiv in the early hours of Friday morning, with multiple explosions resonating throughout the Ukrainian capital.
Russian troops were advancing on the capital and there was heavy fighting in Ivankov, although a key bridge was blown up to slow their progress.
European gas futures rose 36 per cent on Thursday after surging as much as 65 per cent after Germany halted the approval process for the Nord Stream 2 gas pipeline from Russia.
The London Metals Exchange index remained near record highs after aluminium led a 2.6 per cent rise on Thursday, while Chicago wheat futures rose as much as 2.8 per cent to a more than 13 year high of $US9.60 a bushel.
Russia produces about 6 per cent of the world’s aluminium and 7 per cent of the world’s nickel. It is also the world’s second-largest oil exporter after Saudi Arabia.
Ukraine is the world’s fifth largest exporter of iron ore, the seventh-largest producer of wheat, the sixth-largest producer of corn and accounts for about 16 per cent of global grain exports. Ukraine was also until recently the third-biggest coal producer in Europe.
While Thursday’s big reversals in markets may signal a peak of the “invasion trade”, Russia’s true intentions regarding Ukraine remain unclear and it may still face deeper sanctions that cause further significant gains in commodity prices, with implications for inflation, growth and Federal Reserve policy.
“The market reaction to the Ukraine conflict reflects a fear of the unknown about how far the conflict will go, how severe sanctions will ultimately be and uncertainty about how severe the economic impact will be with the main threat being through higher energy prices,” AMP Capital chief economist Shane Oliver said. “In terms of the latter the key risk is that Russia – which accounts for around 30 per cent of European gas imports – cuts off its supply of gas to Europe when prices are already very high, with a potential flow on to oil demand at a time when conflict may threaten oil supply,” he said.
“In short, investors are worried about a stagflationary shock to Europe and, to a lesser degree, the global economy generally.”
There were reports on Friday of buyers of Russian crude oil and LNG being unable to secure credit lines from some banks amid fears of further sanctions being applied by the US.
US sanctions targeting a small number of Russian banks have started to impact trade finance and there is “elevated uncertainty” about the outlook for commodity exports not just from Russia but also from Ukraine, with logistics in Ukraine “shutting down” amid war.
“Rail logistics in Ukraine are being wound back as rail capacity is being prioritised to evacuate people, ports are closing, and that has supply impacts for Ukraine’s exports of iron ore and steel,” said Lachlan Shaw, co-head of resources research at UBS.
“We are seeing Ukraine’s steel producers and iron ore and coal miners scaling down because they can’t get logistics.”
Just what that means for commodity markets is uncertain because there may also be reduced demand for some commodities, particularly amid a potentially sustained energy crisis in Europe, and because the market had already discounted a higher likelihood of more disruption of supply.
The commodities “most in play” were oil and gas, palladium, nickel, aluminium and coal, with the latter very important since Russia accounted for 10-15 per cent of the global supply of both metallurgical and thermal coal, and contributed the most to the supply increase in the last three years.
“Russia was an important supplier of coal into Europe and that’s likely to be redirected east to Asia,” Mr Shaw said.
“Expectations are that China may not sanction Russia so it may take more of Russia’s coal and that may help alleviate supply-demand imbalances.”
“The big thing we don’t have clarity on is what further response there will be in terms of sanctions on Russia. The two things that matter most for commodity trade are bank finance and direct trade sanctions.”
A critical and related issue was whether there would be sanctions on Russia’s energy exports.
“That’s important because it will continue the energy price crunch that we’ve seen through Europe’s winter, and that in turn may see metals production curtailed,” Mr Shaw said.
“A lot of people in the market had expected that as we come out of winter in Europe, energy prices were expected to fall, and that would have allowed curtailed metals production to return, leading to more supply and metals prices falling.
“If we don’t see that, metals prices trade higher for longer.”
In these scenarios, the winners will be producers of affected commodities elsewhere. Rio Tinto and South32 stood to benefit from higher aluminium prices, IGO and BHP were well placed on nickel, and higher zinc prices would help South32 and Sandfire.
Higher metallurgical coal prices would help BHP, South32 and Coronado, and a jump in thermal coal would rub off on Whitehaven, Coronado, New Hope and South32. To the extent that all metals prices remained high because energy prices were high, Australian copper producers including BHP, Rio Tinto, Sandfire and OZ Minerals were well placed.
“While considerable uncertainty remains as to how the situation plays out from here, potential high prices for impacted commodities may positively impact miners’ earnings,” Mr Shaw said on Friday.