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Are commodity markets over-reacting to Putin’s mobilisation order?

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Vladimir Putin played the next card from his deck as he starts to run out of options on the Ukraine conflict. This time he has ordered the mobilisation of reservists in Russia, the figure 300,000 is being bandied around, prompting immediate buying of oil and gold. We saw a short term spike in Brent crude, trading at 92.7 at time of writing, and gold was also up 0.6% today.

The markets had been moving their focus away from Ukraine, starting to worry about last week’s inflation print from the US and also a potential cooling of the Chinese economy as Beijing struggles with its zero Covid policy. Putin’s decision has traders watching Ukraine again.

But just looking at the 30 day gold chart, for example, demonstrates how far gold has dropped since August and how much ground it would need to make up. The same goes for oil, which is well off its 30 day high. Indeed, oil is now only up 13% on a YTD basis. We have seen some recent upside action on the VIX, but this looks like it has been driven more by US economic concerns than Ukraine, thus far. The VIX has the potential to spike higher now, up to the 32 level if there is more ranting out of Moscow.

“President Putin’s announcement on partial mobilisation has rattled markets as investors were expecting the main event to be focused on tonight’s FOMC update,” said William Masters, a senior sales trader with Saxo Markets UK. “Gold and dollar rallied in a flight to safe havens, and unsurprising to see EU gas, diesel and wheat witnessing the biggest upward response from the escalation with Dutch TTF Gas Oct futures +10% this morning. The move by Russia highlights the conflict is far from over and investors need to price the continued short-term volatility into their views.”

How seriously should we be taking all this?

Some kind of response from Russia was inevitable, as Russian forces have had the worst of it over the last few weeks in Ukraine. There is really no getting away from that, and the state of the Russian POWs being brought in by the Ukrainians was indicative of an army facing severe morale and logistical problems. Restoring to heavier artillery and longer-range missile strikes does not seem to be able to keep the Russian army holding the line in a conflict which it really does not want to be fighting.

The actual mobilisation of reservists is also more a symbolic gesture:  manpower is not going to solve this war for Putin. Estimates within the intelligence community right now point to around 5000-6000 reservists that Russia can put into the line at short notice. The figure of 300,000 will take much longer to realise in terms of overall preparedness, and will likely not be available until the spring, at the best-case estimate. Given the logistical ineptness already clearly demonstrated by the Russian military, possibly longer. The big question now is whether Putin is trying to get himself as many negotiating chips as he can garner before initiating peace talks.

“Look, who knows at the end of the day if Putin would be willing to start talks,” said Ian Bremmer, President of Eurasia Group. “But what is very clear is that Putin’s willingness to accept an outcome of the war is nowhere close to what would be remotely acceptable to Zelensky and the Ukrainian people. Putin is not going to willingly give up the territory that Russia has captured since February 24th. And the Ukrainians believe that by fighting, they can potentially take it back. So I don’t think we are anywhere close to an end to the fighting in Ukraine, over Ukraine, and more broadly between Russia and NATO.”

Where to now for gold and oil?

The oil market will remain volatile over the short term, but without a major actual escalation in the fighting – e.g. deployment of WMDs on the battlefield in Ukraine – oil is going to be subject to some downward pressures as well. Most significantly, we think, are the economic numbers from China going forward. Bad news here will yank the rug out from under the oil price.

As for the gold price, we anticipate that is really going to be more reactive to the FOMC than anything Russia says at the moment. While the market has a 75bps hike well understood, there are some concerns that the statement from Jay Powell could be very hawkish. Markets will be on the lookout especially for references to the length of time the Fed will maintain restrictive policy.

“Traders are also going to pay close attention the updated economic projections for a clue about how far the Fed will go,” observed Neil Wilson, Chief Market Analyst with Markets.com. “Terminal rates could rise afterwards. This week has been marked by rising yields and jittery stock markets so hold on tight as it’s likely there is going to more of the same.”

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

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