What is even more frightening is that in the context of high inflation and recession signals, the Russian-Ukrainian crisis may be the last straw that crushes the US economy...
Russian-Ukrainian tensions continue to stir markets. On Monday afternoon, WTI crude oil futures and Brent crude oil futures fell by $1 in the short term, giving back all of the day's gains.
In terms of stock markets, European stocks fell more widely, with Italy's FTSE MIB falling 3%, Spain's IBEX35 down 2.7%, Germany's DAX down 2.71%, and Europe's Stoxx 50 down 2.69%.
On Friday, the U.S. government claimed that Russia could invade Ukraine at any time, triggering a sharp rise in risk aversion, with gold, crude oil and stock markets reacting quickly.
Over the weekend, tensions between Russia and Ukraine did not cool down, and during putin's emergency phone call with Biden, the two sides still seemed to disagree. Biden said the United States is committed to ending the Ukraine crisis diplomatically, but is "equally prepared to deal with other scenarios." The Russian side said the United States and NATO did not consider Russia's main security concerns and did not receive a "substantive answer" on the key elements of their security demands.
Foreign media expect that considering that the phone call between Biden and Putin has not made any breakthrough, coupled with the US side's warning that Russia may attack Ukraine as early as this week, this week will be the most tense week of the confrontation between the United States and Russia on the Ukraine issue. That uncertainty is dealing another blow to a market that is already confused by inflation and fed rate hikes.
Safe-haven gold vs risk assets
The performance of the market on Friday seems to have indicated that a further escalation of the Russian-Ukrainian crisis will prompt gold prices to rise. Despite high fed interest rate hike expectations, gold has strongly advanced to the $1850 mark, driven by risk aversion.
Nicholas Frappell, global general manager of ABC Bullion, said risk aversion and lower real yields should help gold, but a rise in the dollar could hinder further gains. However, higher crude oil prices could exacerbate market concerns about inflation and growth, which could give gold a further boost.
Edward Moya, senior market analyst at OANDA, believes that if there is a military move, gold may rebound above $1900.
For the risk asset, the U.S. stock market, the uncertainty brought about by the escalation will undoubtedly increase market volatility, which may put some pressure on the U.S. stock market in the short term, but some analysts pointed out that the U.S. stock market tends to overcome geopolitical shocks relatively quickly.
Ryan Detrick, chief market strategist at LPL Financial, once noted in a note that looking back at the major geopolitical events since World War II, the stock market has not been greatly affected, and any correction will quickly rebound. The Kennedy assassination is one of the best examples, and over the next six months, the U.S. stock market ushered in one of the strongest and least volatile periods in history.
Ned Davis Research, which did a similar study, analyzed 28 of the worst political or economic crises in the 60 years before the 9/11 attacks in 2001 and found that of 19 of them, the Dow rose over the next 6 months. So analyst Mark Hulbert suggests that after these black swan events, don't succumb to the urge to sell immediately, or you'll end up finding yourself selling at a low point; by contrast, it might be better to take no action.
Three-digit oil prices did not run? The panic effect is not long-lasting, and the focus depends on supply
Some market participants believe that if Russia invades Ukraine, energy prices are expected to soar, potentially putting crude prices above the $100-a-barrel threshold for the first time since 2014. Phil Flynn, a market analyst at Price Futures Group, said that if war breaks out between Russia and Ukraine, the price of oil at almost $100 / barrel can be guaranteed. Flynn said:
"Oil prices are likely to fall after a sharp spike, and the $100 oil price is more likely to be due to an inventory tightness not seen in years." Previously, the monthly IEA report warned that the crude oil market would tighten further, which made any potential supply disruptions exacerbate the situation. ”
Volatility in WTI crude oil futures rose 53 percent on Friday.
Previously, veteran strategist David Roche also said that if Russia invades Ukraine and triggers Western sanctions, prevents Russia from using foreign exchange mechanisms or prohibits Russia from exporting goods such as oil, gas or coal, oil prices will reach $120 / barrel.
However, in Morningstar's view, a Russian invasion of Ukraine could seriously disrupt global oil supplies in a number of ways, but it is unlikely. Dave Meats and Allen Good, analysts at the agency, point out three reasons:
1. High oil prices make it difficult for the United States and Europe to accept the consequences of sanctions on Russian crude oil exports. Considering that energy exports account for 60% of all Russian exports and 30% of the country's GDP, iran-style sanctions on Russia appear to be a strong deterrent, but the problem is that the current oil and gas prices in the United States and Europe are already too high, and oil sanctions serious enough to hurt Russia will also cause economic difficulties in Europe and the United States. So they argue that while the U.S. may adopt sanctions of a certain nature, it is expected to avoid Russian crude oil exports.
2) Choosing to restrict crude oil exports is too painful for Russia. While Russia could emulate the embargo imposed by Middle Eastern countries such as Saudi Arabia in 1973, it would be a huge sacrifice for Russia given its dependence on oil and gas revenues.
Pipeline infrastructure at risk is only a fraction of Russia's supply. Russia expects production to reach 10.4 million bpd by 2022, or about 10 percent of global supply, but most of its production is in southeastern Russia, far from Ukraine, so military action is unlikely to have a significant impact on production. The main problem is that some of Russia's crude oil export routes will pass through Ukraine and the Black Sea, and the Druzhba pipeline, which flows about 1.4 million bpd/ day, may be at risk of disruption. However, the northern section of the pipeline passes through Belarus and bypasses Ukraine, while the affected southern section has a relatively small volume of traffic and therefore has little impact.
Overall, tensions in Ukraine raise the risk premium and push oil prices up, but this is only short-lived until crude supply is actually affected. As long as supply is not affected, such prices will not last.
The harbinger of a recession is coming, what will the Fed do?
Some institutions pointed out that from the perspective of the cycle, the Russian-Ukrainian conflict and the surge in oil prices may become a harbinger of a US recession. At present, the US economy has shown the late cycle characteristics of "accelerated unemployment + accelerated inflation upward", and the oil crisis will become the "last straw to crush the camel".
According to bloomberg Economics models, if crude oil prices rise from around $70 at the end of 2021 to $100 at the end of the month, inflation in the U.S. and Europe would rise by about 0.5 percentage points in the second half of the year. Peter Hooper, head of global economic research at Deutsche Bank, said:
"The oil crisis has exacerbated the now broader inflation problem. As a result, global economic growth is likely to slow sharply. ”
At present, the US Treasury yield curve is beginning to flatten, which has always been an important indicator of recession. Persistently high inflation will exacerbate this problem, as Deutsche Bank strategist Jim Reid said the following:
"With the spike in U.S. CPI data, there is a growing risk of inversion of U.S. Treasury yields, and the recession has begun to count down earlier."
Qualcomm (164.64, -9.43, -5.42%) inflation accompanied by the risk of recession, will the Fed choose to raise interest rates or continue to ease to promote economic growth? Jay Hatfield, chief investment officer at Infrastructure Capital Management, believes the escalation of the conflict could make the Fed more dovish than the market currently thinks, as uncertainty about the economic outlook will increase.
But if oil prices continue to soar, the Fed is likely to maintain the pace of tightening. Bill Adams, chief economist at Comerica Bank, said:
"By pushing up energy prices, a Russian invasion could exacerbate inflation and put more pressure on the Fed to raise interest rates." From the Fed's perspective, the inflationary impact of the Russian invasion and rising energy prices could outweigh the negative impact of this shock on global growth. ”
Source: Golden Ten Data