Head of Commodity Strategy
Summary: Commodities depending on supply from Russia and the Black Sea has risen strongly during the past 24 hours after Putin announced plans to step up its war in Ukraine. European natural gas prices trade back above 200 euro per MWh with the cost of diesel also receiving a bid. Equally concerning is a fresh spike in wheat prices at the exchanges in Chicago and Paris with traders worrying the UN supported export corridor from Ukraine could be at risk, thereby lowering supply to a global market already concerned about the availability of high protein wheat
An increasingly desperate and with that an increasingly dangerous President of Russia has ordered the mobilization of reservist troops to ‘protect’ Russia’s territorial integrity. A territory which Putin would like to see include the self-proclaimed republics of Luhansk and Donetsk, and the Moscow-controlled regions of Zaporizhzhia and Kherson, where people in the coming days will vote on whether to become part of Russia.
The news and threat of escalating the war send the Moscow MICEX index down by more than 10% and weakened the euro, the latter already under some nervous pressure ahead of today’s expected 75-100 basis point rate hike from the US Federal Reserve. Commodities depending on supply from Russia and the Black Sea region have responded by trading higher with particular focus on gas, diesel and not least wheat.
Wheat futures in Chicago and Paris trade sharply higher after the Russia news - which broke yesterday - was followed up by today’s announcement from Putin. The referendum and annexation of the Russia controlled areas would likely further increase tensions with Europe and the US while casting more doubts over grain supplies from the Black Sea area, especially the UN sponsored export corridor from Ukraine which recently has helped ease supply worries for wheat and sunflower oils.
The Ukraine wheat export reached 883,000 tons in August but remains well below the 3.65 million tons that was shipped last year, and the long-term average around 3.1 million tons. September is normally the busiest month for Ukraine exports with an average 3.3 million tons having been shipped in recent years. However, with plenty of grains still left in silos, albeit from a much-reduced war impacted harvest, an escalation in tensions could impact the ability to ship wheat to a global market worried about supply ahead of the northern hemisphere winter and a triple dip La Nina potentially causing problems for producers on the southern hemisphere, especially Australia.
Paris Milling wheat for December delivery trades above resistance-turned-support at €340 per tons with the next upside level of interest around €353 per tons.
European TTF benchmark gas trades back above €200 per MWh after touching a €170/MWh low on Tuesday as the market worry Russia may further reduce gas flows on the two remaining pipelines still open. Especially the Ukraine transit via Sudzha which is currently proving around half the 80 mcm/day currently being sent to Europe, down 290 mcm/day from the same time last year.
Diesel futures and refinery margins (red lines below) in New York and Europe also responding with strong gains with low inventory levels on either side of the Atlantic potentially being challenged more by the EU embargo which undoubtedly given the latest developments will go ahead from February next year.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
