All hell broke loose yesterday, as the Russian President Putin said on a TV address that he recognizes the Ukraine’s two separatist regions Donetsk and Luhansk as republics. The latest statement also hints to the end of the Minsk agreement and a clearly heightens the risk of a Russian invasion in Ukraine in the coming days. Putin already ordered ‘peacekeeper forces’ into these regions.
The latest turn of events narrows the chances of a Russian pullback, and the window for diplomacy is almost shut. The US ordered new sanctions on Russia and the new Russian-backed republics; Europeans pledged to respond as well. This is the worst escalation since the Cold War.
After the US-China trade war and a global pandemic, the Russian crisis is the next big thing on the world’s agenda. Unfortunately, governments and central banks have limited munition left to fight back a war-induced global recession.
Market reaction: Russian futures lost near 14% yesterday, the DAX futures were trading 4% lower as Putin was breaking the news, the natural gas futures were up 8%, oil jumped more than 3% and gold advanced to $1914 per ounce.
The risk off mode will likely stay on for the coming hours, but at this point it’s hard to predict what’s next. Any positive news could reverse the bearish action and lead to sudden jumps in risk asset prices, yet a further escalation of tensions, which now became the base case scenario, should further enhance gains in energy, safe haven assets and gold.
US crude flirted with the $95 a barrel yesterday. A concrete military action in Ukraine would mean a severe disruption to energy supplies – and other commodities, and should gather enough momentum to send the barrel of crude above the $100 mark.
Gold has been a solid hedge against the geopolitical tensions, although it hasn’t been a brilliant hedge against the rising inflation and inflation expectations over the past couple of months. There is potential for a further advance toward $1950/2000 region.
In the FX markets, the US dollar remains strong, and the activity on other FX pairs is mostly driven by a solid demand for greenback. The EURUSD is testing the 1.1280/1.1300 support, while the USDJPY loses ground below the 115 level, as capital flows into the safe haven yen. The Swiss franc is also stronger against the greenback, but the gains are more notable against the euro. The euro-swissy fell from above 1.06 to 1.035 in about two weeks. It’s bad news for the Swiss export companies, but it’s good news from an inflation perspective, as inflation in Switzerland remains very much contained compared to the rest of the world, as the strong franc protects Switzerland against a part of the global overheating in consumer prices.
