By Geoffrey Smith
Investing.com -- Oil and natural gas prices surge to new highs as the U.S. floats a full ban on purchases of Russian energy. The euro slumps in the face of a stagflationary shock and the threat of global instability driven by high food prices increases as wheat prices hit new all-time highs. Stocks are set for a rough ride. Here's what you need to know in financial markets on Monday, 7th March.
1. Oil surges as Blinken moots Russian energy purchase ban
Global stock markets tumbled as crude oil prices leaped again to their highest since 2008, after U.S. Secretary of State Anthony Blinken said that the U.S. is actively looking at closing the sanctions loophole that allows Western buyers to keep buying Russian oil and gas.
U.S. crude prices rose as much as 10% to hit $130.33 a barrel, while Brent futures rose as high as $130.89 a barrel, before both retraced to be up just over 6% on the day by 6 AM ET (1100 GMT). Prices of other commodities where Russia is a key exporter, such as Nickel, Palladium and wheat (see below), also hit new highs.
Blinken’s comments represented a shift in U.S. policy, after initial hesitation on the part of President Joe Biden, who is reluctant to push domestic gasoline prices higher. Pump prices are now over $4 a gallon in many states, while wholesale futures topped $3.70 a gallon in overnight trading.
A tightening of official sanctions would reinforce the ‘self-sanctioning’ already evident in oil markets, which saw one Russian export tender after another find no buyers last week. Shell (LON:RDSa), which broke ranks to buy a cargo of Russian crude at $28/barrel below benchmark prices on Friday, was pressured by public outrage into saying on Sunday it would divert all profits from the trade to a charity helping victims of the war.
2. Euro slumps on growth, inflation fears; Swiss National Bank steps in
The economic shock of the war, and the latest rise in energy prices, is glaringly asymmetric: it will hit Europe much harder than the U.S., because Europe relies so much more on Russian energy. Germany has resisted pressure for a full ban on Russian energy imports, but other voices in the EU, notably in former Soviet bloc, have said they think the security concerns trump the economic pain. Benchmark European Natural Gas Futures exploded to hit 345 euros ($374) a megawatt-hour before retracing after a German government spokesman said his country wouldn't be part of such sanctions.
The euro fell to as low as $1.0807, extending its worst 3-day streak since 2020. It’s now lost nearly 4% against the dollar in the last week, amid growing belief that the European Central Bank will put on ice any plans it had for tightening monetary policy, despite the high current level of inflation.
Meanwhile, the Swiss National Bank said it was ready to intervene to stop the Swiss franc – one of the world’s favorite funding currencies – appreciating further. The message was enough to make the franc stay below parity with the euro.
The dollar index, which tracks the greenback against a basket of developed market currencies, hit a fresh 22-month high. Other havens were also in demand: Gold Futures topped $2,000 an ounce.
3. Stocks set to open sharply lower; Cohen adds to his turnaround portfolio
U.S. stocks are set to open sharply lower as the prospect of higher oil prices stokes fears of an inflationary shock and a growth slowdown at the same time. That’s despite a monthly labor market report on Friday that showed the U.S. economy in rude health and fast closing in on replacing all the jobs that were lost in the first year of the pandemic.
By 6:15 AM ET (1115 GMT), Dow Jones futures were down 528 points, or 1.6%, while S&P 500 futures were down 1.6% and Nasdaq 100 futures were down 1.7%.
With earnings season having run its course, the focus is shifting to ad hoc news, notably in merger and acquisition activity. Stocks likely to be in focus later include North Dakotan shale drillers Oasis and Whiting, which The Wall Street Journal reported to be in merger talks on Sunday. Also in focus will be Bed Bath & Beyond (NASDAQ:BBBY) after Chewy (NYSE:CHWY) founder Ryan Cohen amassed a stake in the troubled retailer (apparently turning GameStop (NYSE:GME) around isn’t enough of a challenge).
4. Russian economy creaks as debt defaults loom
In Russia, meanwhile, the economic situation continues to deteriorate sharply. The dollar gained another 12.8% against the ruble in Moscow on Monday, and the Russian currency has now lost half its value since the invasion started.
Over the weekend, some 4,300 people were arrested at anti-war rallies that followed the near-total ban imposed on independent media on Friday. American Express, Visa (NYSE:V) and Mastercard (NYSE:MA) announced further restrictions on their services (although they will continue to work for payments by Russians within Russia), while Netflix (NASDAQ:NFLX) and accounting giants EY, KPMG and PwC all suspended their services in the country.
The first of what will be many defaults on international debt will probably be confirmed Monday, as oil company Rosneft and gas giant Gazprom (MCX:GAZP) appear likely to make use of a new Russian central bank dispensation allowing them to service their foreign currency debt with ruble payments. That will breach the covenants in their respective bond prospectuses unless holders agree to the move, which seems unlikely given the ruble's sharp depreciation.
Gazprom in particular is one of the biggest corporate debt issuers in dollars and euros, and any formal default would send shockwaves through emerging debt markets.
5. World grain crisis looms; Wheat hits new ATH
Wheat Futures were again suspended, limit up at a new all-time high of $1,294.12, on the CME as fighting in Ukraine continued to disrupt supply from two countries that supply nearly 30% of the world’s most important grain.
Analysts are increasingly concerned about the impact of the war on global food prices, given the key role played by Russia and Ukraine in other agricultural commodities such as corn and sunflower oil and fertilizer. The fighting is already putting an end to sowing in most of parts of Ukraine, locking in reduced harvests this year from the affected regions. Lower fertilizer availability will depress yields further.
High food prices were one of the factors that contributed most to the Arab Spring in 2010/2011, and are already causing concern in Egypt, a country of 105 million people that imports over 80% of its wheat from Russia and Ukraine and which subsidizes bread prices extravagantly.