Very Challenging

Tuesday was another very challenging session for risk sentiment.

Tensions in eastern Europe worsened as the Russian military looked poised to resort to more invasive means in pursuit of Kyiv and, ultimately, regime change, while the international blowback showed no signs of abating.

Apple removed RT and Sputnik from its App Store and halted sales of its own products in Russia, which were listed as “unavailable” for purchase or delivery. “We have taken a number of actions in response to the invasion,” the company said, in a statement to CNBC. “We have paused all product sales in Russia… and we have disabled both traffic and live incidents in Apple Maps in Ukraine as a safety and precautionary measure for Ukrainian citizens.” Nike also stopped selling in Russia.

Oil catapulted higher. In fact, nearly every major grade is now in the triple-digits. Brent rose above $107 (figure below) and WTI traded around $106.

The Bloomberg Commodities spot index rose more than 4% on the session, and is now up more than 100% from the lows seen during March of 2020, at the onset of the pandemic and amid an ill-time price war between Riyadh and Moscow.

This presents Jerome Powell with a very vexing communications challenge when he testifies on Capitol Hill this week. “The market is trading the developments in eastern Europe from the perspective of the global growth outlook, however with the front-month WTI contract as high as $106.78/bbl and gasoline prices following suit, lawmakers are sure to be focused on the spillover into the price at the pump,” BMO’s Ian Lyngen and Ben Jeffery said. “Combine this with the decades-high inflation pressures already evident [in] the CPI data and it’s difficult to envision anything other than a hawkish skew.”

Of course, that hawkish skew is set against the most fraught geopolitical backdrop in recent memory. Traders have aggressively repriced the rates outlook. Swaps were pricing just 22bps for this month’s meeting, a dramatic turn of events from pre-invasion speculation about a “super-sized” liftoff. “At its core, the Fed can only moderate its hawkishness so far in response to the issues in Ukraine given the domestic inflation landscape,” BMO’s Lyngen went on to say. Two-year yields are 40bps below the highs seen around January’s CPI report (figure below). Five-year yields fell some 15bps on Tuesday.

Equities are untradable. Figuratively in the US and literally in Russia, until the MOEX opens for stock trading again.

Late Tuesday, the UK hit Russia with even more sanctions. British citizens and entities are barred from providing financial services to Russia’s finance ministry, central bank and wealth fund. Sberbank can no longer clear sterling payments. The UK also slapped sanctions on Belarus, as Ukraine warned there are hundreds of Belarusian tanks sitting on the border, suggesting the country is on the brink of joining Russia’s assault. The US sent the Ukrainian military more Stinger anti-aircraft missiles.

Finally, Visa and Mastercard are blocking Russian financial institutions from their networks to comply with sanctions. Visa said it’s “prepared to comply with additional sanctions that may be implemented.” The companies are donating millions to humanitarian relief for Ukraine.

Oh well, there’s always crypto. Bitcoin is up 20% since the West moved to invoke the SWIFT ban and targeted Russia’s central bank. The crypto rally was attributed in some circles to its appeal as an inflation hedge. If you believe that, you probably believed the Kremlin when it said Russia had no plans to invade Ukraine.


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8 thoughts on “Very Challenging

  1. China has to piss or get off the pot. They look upon themselves as an empire, juvenile, and they actually can decide the course of history. China’s Covid policy now comes in to play strategically.
    They could buy Russia pennies on the dollar right now, but then who owns whom?

    1. The way that this is currently progressing, China may also be able to buy lots of Western assets at discounts in the months ahead. Of course, they’ll be bidding against Warren & Charlie.

      With the Ukrainians (rightly) prepared to fight it out to the bitter end, and Putin pot-committed to weeks (months?) of urban warfare, and official energy sanctions next on the list if (when) civilian casualties and starvation start to materialize, and Saudi Arabia + UAE unlikely to bridge all the Russian shortfall, I’m having trouble seeing how this doesn’t end up in vicious stagflation by Memorial Day.

    2. Buying Rubles might be like buying Denarius’s. Just purchasing pieces of paper that used to hold some value. If Russia is indeed headed for an economic collapse, that currency will be worthless when it’s over.

  2. I’m trying to put myself in China’s position. What do “I” want?
    – A stable global financial system and a growing global economy (my economy depends on exports) that
    – RMB an alternative to USD for trade (so that US doesn’t have so much sanction power, for my future Taiwan takeover)
    – The bulk of trade still in USD (because otherwise it is too hard to control my currency, let the US have that burden)
    – Commodity supply assured with prices stable and lower (because my main way to stimulate my economy is to build infrastructure and housing)
    – US and Europe spending money and effort on ground forces and land-based aircraft (all useless when I take Taiwan)
    – stature and respect globally as the ascendant actor on the global stage (it’s my destiny)

    How can I manage the current huge developing mess that my junior-but-unpredictable partner Putin has created, to my advantage?

    1. Certainly China is working hard to exploit the situation as much as possible. However, they also have to contend with how things might look 5-10 years from now: A potential Russian collapse, with a reinvigorated Western alliance that will now be able to concentrate more fully on containing China.

      1. I am very uncertain of this, but perhaps “I” (China) might like
        – Russia not collapsed, but with fewer Western buyers thus more dependent on selling its oil to me (and more Western buyers for my PV panels and EV batteries)
        – West/NATO and Russia diverting economic resources to armed forces facing off in Europe where they are no threat to me
        – A weaker, more manageable, but still undemocratic Russian govt
        – Global accolades for being the world’s peacemaker

        Perhaps?

        I would have perhaps preferred to see West meekly acquiesce to Russia taking Ukraine as precedent to me taking Taiwan, but that seems unlikely now – so what’s next best outcome?

        1. Good grief @jyl there be madness if you travel down that road to far, unless, you are traveling in comfort with well stocked bar.

          I proffer you can never see things as “you” (China). You can’t even walk a NY minute in a pair of Chinese flip flops either as a rural peasant, an urban factory piece worker, or a card-carrying party member. No offense. I’m just trying to save you precious time and help you/us to both stay within our cultural/social/milieu circles of competence. The same goes for our Chinese counterparts who would presume to be “us” (USA, or, as Pigtootin likes to sneer over his shoulder in a westerly direction, “Anglo-Saxons!”). Consider how ridiculous Yi Wang comes off when he tries to use his own ‘history’ to try and score rhetorical points glorifying his Nation at our expense! He is ridiculous precisely because he has deluded himself, or his superiors (if not that, then he’s probably best categorized as “Useful Idiot”), into thinking he can put himself in an occidental mindset and so hurl our own words and arguments back against us like barbs to greater effect, or that he can shape his own oriental arguments to impart maximal impact because he has a special understanding of his adversaries worldviews. Fool’s errand that is.

          Here is an idea I rarely practice. Value it as you would any free advice 😉 When you read or listen to a troll, be they a highly placed Chinese diplomat like Yi Wang or lowly placed Russian AI chat bot, cultivate a sense of calm. Then, try and feel what strings they are ‘plucking’ in your mind. Does a pattern emerge if you have to endure it long enough? Keep in mind, this is essentially troll-static, and unless you are sitting across the table flanked by lawyers hashing out the details of contract language then the ‘word salad’ spewed isn’t worth expending an iota of attentional effort on beyond the gist. Probably 96% or more of the words directed at us subliminally, or captured consciously, by non-familiars every day is essentially Trollese. The 4%? A stop sign or any variation on “mind the gap” for example. Truth is, if you don’t control the feed, there’s rarely a signal in the noise. My apologies if you are a Serenity fan, but, remember how Mel died! Mel, merely a well kitted listener of noise, forget he was messing with the Powers that put the Signal in the Noise! Probably not a fable the average Chinese internet user needs to be reminded of. Unless you already know what you are looking for based on extensive experience it is probably just a waste of time hunting for signals in this supposed ‘Age of Information.’ Mel lost sight of the fact we are men, not gods, and no amount of HFT gear will change that.

          Now, back to pondering imponderables. I offer no answers for that is futile. But here is some grist for your mill I don’t need. Recall the US Navy made a very public destroyer patrol through the maritime routes China likes to strut about in just as Pigtootin was preparing to go off the rails. China did not send any fighter jets to disturb the sleep of the peaceful islanders, no doubt resting after working overtime making the chips the world’s manufacturers and consumers crave the most, in the wake of this patrol that I remember reading about. Xi has deviated from his predecessors lay-low approach and what has it gotten him? Even wannabe demi-God Xi-lla must be doing a bit of a rethink. He just watched almost every OECD market he wants to sell high value added exports into work themselves up into a righteous fury in a matter of days. Keep in mind too, the ridiculously counter-productive China Tiger nonsense in the EU went quiet pretty quickly not that long ago. More rethink? Anyway, this is running on to long. Time for an ancient Chinese saying I just made up: “The hungry wise man walking on the temple path does not try to separate savage curs fighting over a soup bone with his bare hands.” Reminds me of another one: “Even the dumbest dog does not chew on the Master’s razor.”

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