Breakfast

Wall Street Breakfast: Wild Swings

Wall Street Breakfast: The Conflict Goes Hypersonic

wild swings

Financial markets went on a rollercoaster ride on Thursday as traders watched the latest developments in Ukraine, where Russia used air, ground and naval forces in an invasion that shocked the world. WTI crude jumped above $100 a barrel for the first time since 2014, before falling back to trade near the $90 level. The Nasdaq Composite even briefly entered a bear market, before becoming a 3.5% intraday loss in 3.3% gain. Stock index futures are down again this morning, along with the Dow, S&P 500 and Nasdaq all down 0.8% in action early in the morning.

Buy the dip: Many players have touted this market maxim since the COVID pandemic, when a sell-off was followed by an unprecedented amount of buying that sent indices to continued record highs. Since then, investors have been hunting for bargains, or so-called oversold conditions, while algorithmic trading has amplified sentiment and contributed to big reversals. Wells Fargo’s Paul Christopher warns there are still “too many uncertainties” out there, but a question-and-answer session during President Biden’s press conference helped calm some nerves.

“First of all, there’s no doubt that when a major nuclear power attacks and invades another country, the world will react and markets will react everywhere,” Biden said from the White House. “The idea that this will last for long is highly unlikely, as long as we continue to remain committed to imposing the sanctions that we will impose on Russia. We have deliberately designed these sanctions to maximize a long-term impact on Russia and to minimize the impact on the United States and our allies.”

Outlook: Western intelligence officials say kyiv could fall to Russian forces within hours. Ukraine’s air defenses have been mostly wiped out, and the Russian military controls several airfields it could use to transport more troops into the country. The endgame for Vladimir Putin would be to install a puppet regime in Kyiv, although Ukrainian President Volodymyr Zelensky has promised to defend his nation, saying he and his government will stay in the capital. (6 comments)

Not SWIFT

In response to the Russian invasion of Ukraine, a series of sanctions were announced yesterday by the US, EU and other Western powers. President Biden cut Sberbank (OTCPK:SBRCY), Russia’s biggest lender, from the US financial system, along with four other banks that account for about $1,000,000 in assets. He also announced export restrictions on semiconductors and aircraft parts, a series of measures on Russian elites (such as freezing their US assets), as well as hampering the ability of Russia to do business in foreign currencies and to negotiate dollar transactions on Wall Street.

Missing from the list? Sanctions on Russian exports of energy or aluminum supplies, and what would be the most severe measure to date: banning Russia from the international payment system SWIFT. The Belgian financial messaging platform connects more than 11,000 financial institutions, tracking and facilitating trillions of dollars in cross-border transactions every day (Russia accounted for 1.5% of transactions on the system in 2020).

Payments are possible without the system, but workarounds are difficult and could impact the entire global economy. For example, while the UK is all for a ban, Germany is very concerned about reciprocal damage due to its large imports of natural gas from Russia via SWIFT. Other EU nations are also affected, and the effort should be coordinated to be applied effectively. “That’s always an option,” Biden noted in his remarks. “But at the moment that’s not the position the rest of Europe wants to take.”

Thought bubble: Disagreements over whether to oust a country from SWIFT have happened before. The most recent case occurred in 2018, when the Trump administration sought to cut off access to Iran (Europe eventually agreed to the ban over fears of violating sanctions against the country). In terms of Russia’s SWIFT ban, its effectiveness is debated among economists. Some say it’s an overhyped tool that could backfire or strengthen ties with China, while others say it has the potential to cut Russia’s GDP by up to 5%. (33 comments)

crazy goods

Commodity prices remain under scrutiny due to supply concerns related to the crisis in Ukraine. The country, together with Russia, accounts for a third of world wheat exports, a fifth of its corn trade and nearly 80% of sunflower oil production. Protracted tensions could jeopardize important shipments from Black Sea ports, as well as production and transport within the countries.

Instantaneous: Wheat prices have already increased by more than 20% since the beginning of the year, while corn costs have increased by 15% YTD. That didn’t stop prices from skyrocketing on Thursday, with wheat (W_1:COM) futures hitting near 14-year highs and corn (C_1:COM) hovering near a high of eight months. The conflict threatens to disrupt the cost of raw materials and food globally as inflation plagues economies around the world.

“There will be a lot of volatility until Russia decides what to do,” noted Jack Scoville of the Price Futures Group in Chicago, “but I think a lot of the emotion has been spent [on Thursday].”

Go further: Daily price limits for wheat futures on the Chicago Board of Trade will be expanded for today’s session, according to parent company CME Group. Limits for KC Soft Red Winter Wheat and Hard Red Winter Wheat will be widened to 75 cents a bushel, after March and May CBOT wheat contracts set the normal daily high of 50 cents on Thursday. . Unless wheat futures show another limit move today, limits will drop back to 50 cents on Monday.

Interest rates menu

Concerns are growing about a Fed rate hike next month, given the global risks created by the conflict in Ukraine. It’s kind of a no-win situation, where raising rates could exacerbate growth disruptions, while staying on the sidelines could worsen inflation and pose a big threat to the economy. The central bank will need to tread carefully in the months and year ahead, and the risk of policy error has never been higher.

Fedspeak: A list of central bank officials stuck to the idea of ​​a March rate hike despite uncertainty surrounding Russia’s invasion of Ukraine. Federal Reserve Governor Christopher Waller even suggested a half-point move if inflation data continues to be hot, as well as cutting the Fed’s balance sheet no later than July. Many traders also see the start of an up cycle in March, but are still debating the aggressiveness of the Fed over the rest of the year.

“We haven’t even fully absorbed and exited the supply shock of the pandemic yet,” added Joe Brusuelas, chief economist at economics consultancy RSM US.

Analyst Comment: “We haven’t had such a big and wide inflation overshoot in decades,” said Bruce Kasman, chief global economist for JP Morgan. While the bank expects inflation to begin to ease by mid-year, a prolonged shock could mount price pressures. “If that happens, the Fed is going to have some very tough choices.”