Traders Brace For Volatility After Historic Weekend

Traders braced for volatility coming out of a historic weekend during which the West severed Russia’s access to SWIFT and targeted the nation’s central bank in a bid to force Vladimir Putin to end military operations in Ukraine.

In the latest sign that Putin’s invasion compelled nations to rethink the wisdom of adhering to some version of neutrality, Switzerland said it would “very probably” introduce sanctions on Moscow and freeze Russian assets in the country. In an interview with Swiss public television, President Ignazio Cassis said it’s critical to preserve Switzerland’s neutrality, but “that does not prevent us from calling a spade a spade.” He called Putin’s actions “the most violent breach of public international law on European soil since the Second World War.” As many as 20,000 people protested against Russia’s actions in Bern on Saturday.

Meanwhile, Norway’s sovereign wealth fund, the world’s largest owner of publicly-traded stocks, froze its Russian holdings and started the process of removing them, an endeavor that’ll be completed in “due course,” according to the Prime Minister.

The earliest of trading in the new week found Brent jumping almost 7% beyond $104, while gold rose more than 2%. The knee-jerk decline in S&P futures was substantial — around 3%. Irrespective of whether the moves hold (or extend or fade), the scope of the initial response was indicative of the crisis the world faced.

After finding itself in the crosshairs of Western sanctions targeting reserves, The Bank of Russia said Sunday it would start buying gold again. “From February 28, 2022, the Bank of Russia resumes the purchase of gold on the domestic precious metals market,” CBR’s press service said. Earlier, the bank promised to ensure an “uninterrupted” supply of rubles, but was silent on foreign currency.

Zoltan Pozsar suggested Moscow may have to find a “friendly correspondent” central bank willing to act as a facilitator. “Gold can be pledged under repo operations to cover one’s dollar needs with a willing, collateral-rich central bank that has enough Treasurys to repo,” he wrote, adding that “one can accumulate dollar surpluses anew through ongoing commodity exports away from financial centers in the West by seeding financial centers in the East.”

If things don’t calm down relatively quickly, the world could soon find itself staring down a commodity squeeze of epic proportions. “While the closure of Ukrainian ports and rail flows is reducing agriculture and metal exports, they have minimal impact on oil flows,” Goldman’s Jeff Currie and Damien Courvalin wrote. “What is more critical, and driving oil sharply higher, is that commodity markets now need to reflect the shadow of sanctions on Russia [and] the risk that Russian commodities eventually fall under Western sanctions.”

On Sunday, Ukraine demanded a total embargo. “We insist on a full embargo for Russian oil and gas,” Dmytro Kuleba, Ukraine’s foreign affairs minister said, before essentially calling anyone consuming Russian energy complicit. “Buying them now means paying for the murder of Ukrainian men, women and children.”

Commodity prices are “very overbought,” BofA’s Michael Hartnett said, noting that raw materials are annualizing a gain of 105%, the largest ever (figure below).

Eventually, the surge in crude prices will precipitate demand destruction, which could “set the stage for peak inflation,” Hartnett remarked.

According to sources who spoke to Bloomberg, SocGen and Credit Suisse have stopped financing commodities trading with Moscow. “The two banks are no longer providing the money needed to move raw materials such as metals and oil from Russia,” the linked article said.

Remember: Geopolitics is just gas on the fire. It’s the fundamentals (which include pandemic disruptions) that pushed up prices. “The bull case for commodities rests not on the current geopolitical tensions, but rather on the revenge of the old economy that has led to underinvestment in commodity supply capacity at the same time that demand-side policies focused on wealth redistribution in the wake of the pandemic have substantially increased commodity demand,” Goldman’s team went on to say, in the same noted cited above.

In the bank’s view, “the current geopolitical risk only reinforces this bull case, and with commodities also providing an effective hedge against this risk, we believe the case for owning commodities has never been stronger.” Goldman’s one-month Brent forecast was raised to $115.