Russian oil payment demands spooks the market
The Ukraine/Russia conflict has suffered some headline fatigue of late, and more than a little complacency by the world’s financial markets, as China’s slowdown fears grabbed centre-stage. With a nod to the Rolling Stones in the title of today’s newsletter, the economic ripples of the Ukraine conflict are back on the front pages. Equity markets overnight took fright at ominous comments from Russian officials around nuclear war, but it was Russia’s announcement that Poland and Bulgaria would have their gas supplies cut off from Russia from today, unless they paid for them in roubles, that jarred market nerves.
It seems that the weaponisation of its energy supplies by Russia has now begun, possibly driven by previously reluctant members of NATO getting on board and supplying heavy weapons to Ukraine. Germany has already stated it could painfully manage if Russia banned energy exports. Poland has said its gas storage is at 80%, but Bulgaria gets near 90% of its gas supplies from Russia, and its only oil refinery is owned by a Russian company. I am assuming though, that the European Union now has contingencies in place to assist immediately affected members. If this is just the start of further energy escalation by Russia, the European Union faces challenging times ahead.
That likely explains why oil prices only reversed their losses from Monday and didn’t shoot into space. Oil prices seem destined to range in a wide by choppy range. Russia concerns rightly supporting dips, while China’s slowdown fears cap gains with lots of noise in between.
Russia’s natural gas aside, markets swung back into full risk-aversion mode overnight. US yields fell, suggesting that investors were heading for shelter in that space (bond prices move inversely to yields). The US dollar soared, with the euro and the risk-sentiment-correlated Australasian currencies coming in for negative attention. EUR/USD has now well and truly broken its 1985 trendline support and if Russia decides to play its gas supply card, a move below parity is on the cards.
The Nasdaq led the equity market wipe-out overnight, with its near 4.0% retreat led by Tesla, which fell by 12.20%. You could look at it two ways. Either Elon Musk sold his latest stock awards to generate the USD 21 billion in cash for his part of the Twitter buyout, or the street is starting to wonder how he could possibly effectively run Tesla, Starlink, Space-X and Twitter simultaneously. I do as well.
The mood will remain dark thanks to after-market Q1 results announcements by Microsoft and Alphabet. Microsoft produced an on-expectation set of results, led by the Azure Cloud division, and maintained an upbeat macroeconomic outlook. Alphabet, unfortunately, missed forecasts, thanks to a deceleration in YouTube revenues. That doesn’t really surprise me; like Meta’s platforms, advertising is now becoming intrusive in both its volume and quality, detracting from the core product. I, for one, am sick of being asked if I have pre-diabetes or having an old guy telling me I need to buy off-market cryptos for immediate capital gains.
Alphabet’s results will increase nerves about the outlook for the tech heavyweights that are announcing this week. That sector has been the last man standing in the Nasdaq index. Meta announces tonight and if my recent user experience with them is anything to go by, there is downside risk again in their results. Expect more hitting of the dislike button by US equities tonight if Meta disappoints once again. It will fall to Apple and Amazon to stop the rot.
The overnight data dump from the US was solid, if not spectacular. Durable Goods rose in March, recovering from their Ukraine slump in February. The house price indexes booked another month of gains in February, while CB Consumer Confidence remained high at 107.30 and the Richmond Fed Manufacturing Index for April was steady at 107.30. Perhaps the only blot was slowing New Home Sales, which rose by 763,000 in March versus 835,000 in February as rising mortgage rates bite. Certainly, there was nothing to suggest an impending slowdown or jarred nerves around impending Fed hikes.
Today in Asia, South Korean Consumer Confidence held steady at 103.80 and China Industrial Products YTD (YOY) rose by a much higher than expected 8.50%. that has steadied the ship in mainland China equity markets today as the rest of Asia heads to the exit door. The big surprise has been Australian Inflation, which hit 5.10% YOY for Q1 today, well above the 4.60% rise expected.
Although the Reserve Bank of Australia is a long way from the inflation debacle that the Reserve Bank of New Zealand has created, it will ramp up the pressure on the RBA to shift its ultra-dovish stance sooner. The Australian dollar has rallied temporarily today on that assumption. Interestingly, the RBNZ Deputy Governor is making a speech today, in Ireland on macroprudential policy implementation. At least the assembled central bankers will learn what not to do.
The rest of the day’s data calendar is strictly second-tier across the globe today. With the Fed in a pre-meeting blackout, markets will probably remain in risk aversion mode, fearful of expanding energy weaponisation by Russia, and more Covid-zero policy-related bad news from China. In all likelihood, Meta’s results this evening will define the US session in a binary outcome. Poor results will probably have a greater impact on equities in the current environment.
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