Rush for the exits: things do not bode well for tonight’s FX open and for Monday’s market open when cash equities begin trading. Analysts are warning Sunday evening of significant market volatility across asset classes as market participants respond to events over the weekend.
The Russian invasion, and the way in which the cards have fallen since, has raised the spectre of huge uncertainty over financial markets. “There will be a significant amount of pent-up stress/uncertainty for the open after a weekend of substantial developments on both the ground and sanctions,” said Neil Wilson, Chief Analyst at Markets.com. “A lot has changed since the Friday close…but as I said then, it was probably not a great idea to hold risk over the weekend.”
Specifically, the decision to remove Russian banks from SWIFT payments system has significantly upped the sanctions ante, along with a series of other measures. There will be carve outs for energy, but oil and gas markets will still be in for a stormy session nonetheless.
Energy markets anticipate bullish move
There will be a significant fear-driven bid for Brent, WTI and natural gas futures, producing ever steeper backwardation. The question is whether the rally holds or is faded later in the day/week. “I expect uncertainty over the war itself and possible Russian reaction (cut off oil & gas supplies) to keep a bid under oil and gas until we learn more,” said Wilson. “Fear over near-term supplies will underpin strength in WTI, Brent and Nat Gas.”
Similar concerns came from Susannah Streeter, Senior Investment Analyst at Hargreaves Lansdown: “For now oil and gas though is still flowing from Russia to Europe but signals that governments around the world are ready to tighten the screw of sanctions further are likely to add to fresh concerns about global energy supplies, piling fresh upwards pressure on Brent crude and natural gas prices. ”
The RUB is the big loser of course – we have already reports of large lines of Russians at ATMs seeking USD. After closing Friday around 83, USDRUB above 100 is already happening. Tinkoff was at 171 to the dollar. Expect a brutal and total selloff as [forex] markets open tonight.
What is less clear is the fallout across other currencies. Swiss and yen are not massively bid yet, so Markets.com says traders may continue to focus on USD, which could rip higher. As a note of caution, Bitcoin has been very steady over the weekend, holding around $39k, which does not imply the market has too much on its mind. “However, I would not assume this has a read across for other assets and makes sense to at least prepare for significant volatility tonight/Monday morning,” Wilson said Sunday.
Cross-border and cross-asset impact
The Bank for International Settlements data on cross border exposure of international banks to Russia shows the most exposed Italy is $25.3bn, France $25.2bn and Austria $17.5bn. The US has $14.7bn and the UK has $3bn. As for equity index futures,
Friday’s relief rally should be unwound and there is anticipated broad-based selling overnight. E-minis are likely to retest the big 4,200 level tonight. The Russian stock markets are toast, and Russia totally uninvestable, so forget about them. It’s a case of getting out first. Whilst oil, natural gas, the rouble and some European banks get the attention, traders should also look to wheat and palladium.
On the equities front here in London, look for major declines for Evraz (EVR), Polymetal (POLY), Petropavlovsk (POG), BP (BP), JPMorgan Russian Securities (JRS) and Ukraine-focused iron ore miner Ferrexpo (FXPO). Investors will likely also sell heavily other major corporates with big Russia and Ukraine exposure.
BP exit from Rosneft
BP’s decision to exit the Rosneft stake will be an eye wateringly expensive one for BP, but the shocked board clearly felt they had no option but to pay the high price and distance the business from Russia’s aggression.
It marks a huge shift in position for CEO Bernard Looney who just two weeks ago indicated that the Rosneft slice remained a core part of BP’s operations, and shows the extent to which corporate Britain is now under pressure to make very stark choices faced with the sharply escalating situation.
“Just how BP will manage this exit is unclear but it looks like it will be highly difficult for the company to recover anywhere near what was considered to be the full value of the stake, estimated to be $14 billion at the end of 2021 and it will also strip BP of lucrative dividends which were due to pour in from the Russian business,” Hargreaves Lansdown’s Streeter observed. “Last year higher oil prices and foreign exchange tailwinds helped BP’s underlying profit from Rosneft rise to $2.7bn from $56m. There are now estimates that extricating itself could cost BP up to $25 billion.”
In addition to the Swift move, Russia’s central bank is also being cut off and blocked from deploying its international reserves. Putin’s war chest of foreign currency just got smaller. It amounts to Russia being all but cut off from the world’s financial system – cue the de-dollarisation cultists proclaiming this will speed up a bipolar financial system.
“Whilst I anticipate some relatively high levels of volatility tonight, what is less clear is the path ahead beyond – what kind of dominoes start to fall when you cut off a relatively large economy from the system,” asked Wilson. “Never has such a large foreign currency reserve been wiped out.”
The question is to what extent this sparks contagion in the global banking system that leads to central banks needing to act to supply the market with the USD it requires? There is a possibility of dollarisation and a shortage of dollars to be the main effect and for a sharp move higher for USD as a result with the natural carry over this would have for peers.
Nuclear rhetoric coming out of Moscow
In response, Putin has placed Russian nuclear forces on high alert – as soon as nuclear hits the headlines we are always in for a rocky ride for markets., but the usual story here is to buy the dip – if there is no nuclear war you win, if there is one, well…but the market still has to dip first.
What do we know so far? It seems the Ukrainians are putting up a much tougher fight than expected by Russia. Nato is gradually pulling together and even Germany appears four-square on the tough anti-Russian sanctions line now. The war is going very badly for Putin right now and Ukraine is being heavily reinforced with the kit it needs to turn the invasion into a nightmare for Russian officers and soldiers.
There are no good outcomes to this crisis. Either Russia wins what would now be a very bloody war (as opposed to the quick Blitzkrieg), and Russian tanks are parked on Nato’s eastern flank with Putin emboldened. Or, we need to think of the consequences of Russia losing this war; Putin chased back to his dacha, badly beaten? What does the cornered bear do then?
“We are in uncharted territory with a hot war in Europe where one of the protagonists has nuclear weapons,” Wilson at Markets.com concluded. “We pin our hopes on talks leading to an end to the bloodshed on both sides…but the geopolitical order is becoming more spiky.”
Defensive stocks may be among the few beneficiaries of a volatile trading period ahead, with Western governments set to significant increase military budgets in the face of Russian aggression.
“Faced with turbulence it may be tempting for investors to try and switch and ditch stocks but during times of heightened volatility, it’s even more important to try and look beyond daily market moves to long term goals and ensure that your holdings are well diversified across a range of assets and geographies,” said Streeter.
