- Are markets really pricing in a collapse of the Russian economy?
- Shares snapped back today
- But commodity prices continue to surge
What if instead of measuring the size of your economy based on make-believe stuff like Zoom and Netflix, you value your economy on actual hard assets, like nickel, palladium or wheat? Or oil... then Russia as the 12th largest economy becomes more like the 2nd or 3rd most systemically important nation to the global economy. Russia accounts for roughly 11 per cent of global oil supply, 17 per cent of global natural gas supply, 11 per cent of global wheat production and a tenth of industrial metals production. Like I said before, are markets even close to pricing in the total collapse of the world’s 12th largest economy? Are they close to pricing for gigantic commodity inflation?
So, while the West was distracted, Russia was getting on with being a bit of a powerhouse in terms of producing the actual stuff that people actually need. This matters now because the West is cutting off all this supply, and it doesn’t have a ready replacement. And so, when people say Russia’s economy is tiny, ‘it doesn’t matter’, they miss the point that it was tiny compared to some la-la-land way of looking at how much stuff is ‘worth’. In a world when hard assets are king, Russia has some aces. But it needs to deploy them, and that is getting harder and harder.
So, to markets and it’s been a case of Vix front end pushing up, oil back up, gold rallying to new cycle high and close to all-time highs. The dollar has come back a touch, but DXY remains above 99. US stock markets swung lower on Tuesday after the worst session since 2020. The Dow Jones had been up almost 600pts but ended down 185pts. The S&P 500 fell 0.7 per cent, further into correction; the Nasdaq slipped by 0.3 per cent, deeper into the bear market. The S&P 500 finished under our 4,200 marker but futures indicate it will rally when Wall Street opens later.
Snapback: European stock markets are enjoying a bounce this morning – some sense that the recent moves were oversold, valuations attractive... bear market rally as stagflation is coming. Nevertheless, today it’s the beaten down autos and travel & leisure stocks doing the lifting. Banks also higher amid broad-based rally for European shares. FTSE 100 +1.5 per cent, DAX +3 per cent at the open. Evraz (EVR), Polymetal (POLY) and Petropavlosk (POG) all say they don’t believe there are affected by sanctions.
US and UK to ban Russian oil... as I said it was only a matter of time... tightens the screw on Moscow and piles pressure on Europe to follow, where it would make a far bigger difference. EU says it is looking at how to reduce demand for Russian gas by two-thirds before the end of the year... huge shift but can it be done? Still leaves a third on the table. Imports of Russian oil, petrol products made up 8 per cent of US total shipments last year. As for Britain, in 2020 Russia was around 11 per cent of UK’s total crude imports around 18 per cent of UK’s diesel imports. Britain will step up its production of oil and gas in response.
Shell’s (SHEL) decision to exit Russia came only a couple of hours before the US/UK announcements so it would have had to follow suit anyway. “We are acutely aware that our decision last week to purchase a cargo of Russian crude oil... despite being made with security of supplies at the forefront of our thinking – was not the right one and we are sorry.” Shell says “intent to withdraw from its involvement in all Russian hydrocarbons” in a “phased manner” “As an immediate 1st step, company will stop all spot purchases of Russian crude oil. It will also shut its service stations, aviation fuels & lubricants operations in Russia”.
Key to market pricing right now is immediate oil – is Saudi Arabia willing to be the producer of last resort? Apparently not; the Saudis and UAE have declined calls with President Biden during the crisis as they appear unwilling to stem rising crude prices. US production will start to rise but it takes time. Iranian deal seems further away again... so Brent is at $130 but liable to extreme volatility and price swings in either direction.
Meanwhile, unconfirmed but apparently accurate reports that Putin has instructed to ensure a ban on the export of products and raw materials outside the Russian Federation until December 31... fire with fire. The list of what’s banned has not been defined. McDonald’s, Coca-cola and Starbucks have also bowed to pressure and are pulling out of Russia. Who’s left?
Finally on inflation, China producer price inflation was up 8.8 per cent, just ahead of expectations, but the slowest pace in eight months.
Neil Wilson is the Chief Market Analyst at markets.com