Australian shares ended 3.1% lower during a chaotic week as investors stayed away from risky assets after Russian troops invaded Ukraine.
Even though the market showed some signs of recovery on Friday with Western nations imposing harsher sanctions on Russia, it was not enough to lift the benchmark which posted its worst week since October 2020.
Australia also imposed sanctions against Russia, targeting several of its elite citizens and lawmakers. Australia, however, was cautious to not impose any oil sanctions which could have inflamed inflation and oil prices further.
Overall while the Australian market wiped out more than 75 billion dollars in value last week there were some bright spots. Afterpay’s owner Block (SQ2) rallied an impressive 40% after posting a better than expected quarterly profit on the back of strong cryptocurrency trading gains and booming retail trade.
Block’s positive results helped other tech companies as well, with Australian technology gaining 8.1% on Friday to mark their best close in 10 years, amidst a shell shocked market that is racked with uncertainty about how the Ukraine crisis will develop as many investors search for safe havens such as gold and oil.
Retailers also recorded interesting results last week. Harvey Norman gained more than 3% despite reporting its first drop in sales since the start of the pandemic. Underlying profits also fell 22%. However, it was the revaluation of the group’s extensive property portfolio that boosted investor sentiment.
Kogan also dropped heavily for the week as continued supply chain disruptions created havoc with product availability.
Financial stocks and miners were all down as well as investors remain cautious due to the situation in Ukraine and the upcoming RBA meeting on Tuesday.
A recent poll done by Reuters found that the RBA will raise interest rates for the first time in over a decade in the July-September quarter.
Looking ahead, there are many Australian releases this week that traders will be looking out for.
The main one is GDP figures released on Wednesday. It is expected that the Australian GDP will come in at around the 33% mark, which is reasonable given the impact of COVID restrictions and lockdowns.
The other big event during the week will be the RBA board meeting on Tuesday. We believe though there will be little change to RBA’s relaxed stance towards inflation during the meeting this week.
Retail trade data, private sector credit, house prices, balance of payments, international trade, buildings approvals and retail trade data will also be released this week.
However, it is the progress or otherwise of the Ukrainian invasion that will dominate the world markets including Australia.
The other big question will be how tough US Federal Reserve will be when it comes to raising interest rates in March in light of the situation in Ukraine.
Fed Chairman Jerome Powell, is due to testify before Congress on Wednesday. Many economists are forecasting that the rate rise in the US will be lower than expected due to the current uncertain international situation. While some think that the US Federal Reserve will not be distracted from its fight to control inflation and hence will continue with a substantial rate hike in March.
In light of mixed messaging from different economists, there should be no shortage of interpretations coming from Jerome Powell’s testimony.
The State of Union address by US President Joe Biden on Monday will also be keenly watched by the market movers to work out if there will be any further economic ramifications.
With International, tensions taking centre stage gold fluctuated wildly throughout the week as it remained the most sensitive asset to shifts in risk perception.
Gold started the week trading sideways as investors remained on the sidelines hoping for a diplomatic resolution to the Russia-Ukraine crisis. However, as Russia started piling troops near the Ukrainian border risk flows began to cool off and bullion started making a move up on Wednesday.
During the Asian session on Thursday, Russian President Vladimir Putin announced that he had launched a “special military operation” in Ukraine and the aim was to demilitarise Ukraine.
Ukrainian President Volodymyr Zelensky soon announced martial law amidst news of shelling by Russian troops across Ukraine. The knee-jerk reaction of the market to the news was an intense flight to safety thus providing a boost to gold.
By European session on Thursday gold reached $1974 an ounce, its highest level in 17-months whereas European and Asian stocks suffered heavy losses.
The West’s reaction to Russian aggression on Russia on Friday morning eased investor fears over the negative implications of a prolonged Russia-Ukraine war on the global economy.
The West while announcing a series of sanctions left the Russian energy market untouched. Western nations also showed hesitancy in cutting Russia off from the SWIFT system, while reiterating it was an option.
The positive tilt in investor mood due to milder than expected sanctions witnessed a shift in risk sentiment as bullion gave up all its weekly gains to end in negative territory for the week, thus snapping its three-week winning streak.
Moving ahead, the actions last week showed that gold is the go-to safe-haven asset for the world market. However, it is also the first commodity to be sold when risk sentiment improves.
Looking ahead, in case Russia agrees to look for a diplomatic resolution and refrains from advancing its troops any further during the start of this week gold will face additional selling pressure. On the other side, a prolonged military conflict with Russia’s intention to take over Kyiv and additional sanctions from the West including cutting off Russian banks from the SWIFT system will support the yellow metal.
From a technical point of view, we remain bullish on gold as long as the price trades above $1870/ounce. $1900 an announce should act as the first resistance on the upside and $1910 and $1920 should act as the next hurdles.
On the flip side breach of support at the $1870 level could see the precious metal slide all the way down to $1850.
Movement in oil prices followed a similar pattern to gold last week. Oil rallied past $100 per barrel as Russia launched an attack on its neighbour. The global oil market which was already perilously tight due to the inability of supply to keep up with the demand recovery from the pandemic got immediately spooked.
However, the prices retreated subsequently to close in negative territory for the week as it emerged that Western governments would not impose sanctions on energy exports from Russia.
In the US, President Biden imposed its toughest sanctions on Russia as tanks moved closer to the Ukrainian capital, but said the currency clearing would include carve-outs for the energy payments. Almost 40% of Moscow’s revenues come from energy exports.
Biden though further added that he is working with other major consuming nations on the release of a coordinated reserve before energy sanctions can be put on Russia. Any such release however would need to be large to prevent a major impact on prices.
Both Japan and Australia have since indicated that they may be part of an international release, China on the other hand has said it has no immediate plans to intervene in oil markets. South Korea too has distanced itself from any reserve releases, however have said they are willing to take action if there is a major disruption in energy shipments.
Goldman Sachs Group Inc said in a note that it expects oil prices to hit $125 per barrel should demand destruction be required to balance the market. Russia’s invasion of Ukraine has already brought turmoil to the commodities market as vital shipments from ports in the Black Sea.
At the time of writing this report at least three merchant ships carrying crude oil in the Black Sea have been hit since Russian forces began an attack on Thursday. The insurance companies have further added to the chaos by either not covering vessels or demanding huge premiums to do so.
Many analysts expect ramifications on inflation and global energy prices to be immense with huge moves in oil and gas prices as the West work on sanctions to maximise the long term impact on Russia.
Russia is the third-highest producer of oil after Saudi Arabia and the United States and the second-highest exporter of oil. It is also the largest exporter of natural gas.
With the near-zero likelihood of foreign troops coming to Ukraine’s direct aid, Western nations are depending on financial and economic tools to stop Kremlin’s advance towards Kyiv.
However, there is also fear that further and most extreme attempts to completely isolate Russia financially can incite Putin to completely turn off energy flows to Europe. As such many analysts expect oil prices to hit $130 a barrel by June if Western nations impose sanctions on Russia’s energy exports due to the Ukrainian conflict. WTI and Brent Crude have not traded at $130 since July 2008.
Last week in our report we discussed how the Russia-Ukraine war could be good for Australia as strong sanctions on Russia would push up prices of goods exported by Australia thus benefitting the local currency.
As such even though world equity markets got hammered as geopolitical tensions in Ukraine simmered, the Australian Dollar was the best performing G 10 currency against the US Dollar.
Although it is largely believed Aussie Dollar which is considered a risk currency was spared as risk sentiment improved as Moscow was spared from being kicked out of SWIFT and energy restrictions.
As such selected Russian banks expelled from SWIFT on Saturday night should have an impact on the Australian Dollar negatively on Monday as it will interrupt trade with World’s largest gas exporter.
However, we believe it should boost prices and demand for liquified natural gas exported by Australian companies such as Woodside Petroleum. The latest sanctions on Russia announced jointly by EU, UK, Canada and US on the weekend has made the collapse of the Russian Rouble inevitable and increased risk of Russian debt default last seen in 1998.
Even though Australia has limited direct exposure to Russian markets the headwinds from the latest sanctions is expected to impact Australia along with the global economy. It is expected that there will be a sharp rise in fuel, gold, iron, aluminium and food prices, which further will flow into inflation.
Australia competes with Russia in the export of gas and with both Russia and Ukraine for the export of wheat.
The sanctions on Russia will help the Australian dollar and exporters with the world buying more Australian LNG and coal seam gas at higher prices to meet interruptions to energy supply caused by sanctions on Russia. As such while Australian exporters and state and Federal Governments will benefit from higher revenue due to the conflict, the Australian consumer will suffer.
Having said that, many analysts believe that sanctions on Russia may backfire with only 30 nations out of 200 signing up on sanctions on Russian banks and major economies like China and India even refusing to criticise Russia for invasion of Ukraine.
According to Mr Muraviev, Associate Professor of National Security at Curtin University, “World is not imposing sanctions, the West is imposing sanctions. By imposing more sanctions, we are making the Russians more and more self-sufficient and recreating an economic version of the Soviet Union.” He further stated that Russia has been developing alternatives to the SWIFT payment systems for a long and has been working collaboratively with China.
As such looking ahead we feel that while sanctions on Russia may benefit the Aussie in the short term and boost revenue for exporters and governments, it would soon be overrun by the adverse impact of global disruption, resulting in the Australian Dollar declining on negative risk sentiment.
The Indian bonds and currency both declined last week as geopolitical tensions weighed on investor sentiment. The Indian government’s decision to go ahead with the last scheduled debt sale of the year also dented the Indian Rupee.
The government of India raised Rs 230 Billion at the last scheduled debt auction after cancelling the last two auctions due to a comfortable cash balance position.
Economists expect Indian currency to continue to come under pressure with recent escalations of geopolitical tensions expected to further inflame crude oil prices. India imports more than 70% of its oil requirements and high global prices pushes up the current account deficit. We expect the USD/INR pair to test 76.25 levels during the coming week.
For people wanting to send money to India, this may be a good time with the Australian Dollar holding strong and the Indian Rupee declining.
Moving on to digital currency, cryptocurrency prices swung wildly over the last week as Russia’s invasion of Ukraine sent shock waves throughout global markets.
As the news of the Russian invasion into Ukraine started to come extreme fear gripped investors sending bitcoin prices below $35,000. Ethereum and other crypto assets followed BTC lower.
Bitcoin, Ethereum and crypto-assets however recovered strongly on Friday along with stock markets as traders came to terms with Russian sanctions.
The extreme volatility in Bitcoin when gold prices have rallied has undermined the popular narrative that the largest digital currency has begun acting like digital gold and investors will flee to it in times of perceived risk.
In fact, crypto traders are now bracing for more severe rotations lower after Russia was kicked off the world’s main international payments network SWIFT on Sunday morning.
It is widely expected that this will result in catastrophe in the Russian currency market with many analysts predicting it will result in the Russian Rouble stopping trading and then the exchange rate is fixed at an artificial level just like in Soviet times.
Many crypto traders believe that the latest measures could trigger fresh volatility and Bitcoin may test the $30,000 support in the near short term. If the situation in Ukraine escalates further Bitcoin may fall even below $30,000 levels as investors will leave for safe-havens.
However, we believe that as sanctions grow in Russia it may use cryptocurrency to circumvent those sanctions thus providing support again to digital currencies. Russia otherwise may not be able to survive growing sanctions from the West.
In agricultural products, the grains market continued to rally as grain traders weighed the impacts of the Russian attack on Ukraine on global food supplies.
With Russia and Ukraine both being major exporters of wheat, wheat prices rallied to a 13.5 year high before stepping back a bit on Friday.
Ukrainian ports are closed for commercial shipping after Russian troops invaded the nation. Corn and soybean also rallied for the week as traders weighed the ongoing geopolitical conflict that could limit Black Sea exports. It is expected the grain markets will likely continue to see spikes over the next few days.
Author: Ateev Dang is a trader and trading coach by profession. He runs a business called Glow trades Pty Ltd where he teaches anyone who is interested in starting their trading journey how to trade. He can be contacted at adang@glowtrades.com.au.
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