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Market Update

Russia-Ukraine war sends shockwaves of volatility

March 14, 2022


As the Russia-Ukraine war escalates in devastation, so does its impact on the global economy. Increasing hostility, both on the battlefield and in the markets, sent reverberating shockwaves of volatility across all asset classes. At home, the U.S. continues to see decades-high inflation levels and a tight labor market.

Commodity markets

Many commodities linked to Russia surged in price early last week but proceeded to retreat as the week ended — volatility, all the while, remained high. Earlier last week, markets priced in an attempt to bulwark Russian aggression as the U.S. and UK announced a ban on all imports of Russian oil, further shocking the global oil supply. The world’s most active oil index, WTI Crude Oil, briefly topped $120/bbl but declined to $109/bbl by Friday. European Dutch TTF Natural Gas, particularly vulnerable to Russian sanctions, soared to an all-time high of €227/MWh on Monday but receded back to roughly €127/MWh by Friday’s market close. The global wheat market, of which Russia and Ukraine collectively export over 25%, remained at elevated levels as well. Wheat prices, according to the Chicago Board of Trade SRW Wheat, climbed significantly over the previous week and are now resting at prices almost 40% higher than they were a month ago.

Foreign exchange markets

Even with the Central Bank of Russia hiking interest rates to 20%, global corporations continue to unwind positions in Russia, leading to a drastic decline in Ruble liquidity and a sustained depreciation of the Ruble. The USD-RUB exchange rate began the week above 140 and closed at 133 on Friday. In a rather unprecedented move for financial institutions, Goldman Sachs and J.P. Morgan announced on Thursday a gradual exit of all Russian businesses and ventures. The U.S. dollar index (DXY), which strengthened 2% two weeks ago, held steady this last week.

Interest rate markets

Much like every other asset class, interest rates failed to evade volatility last week. The 10-year treasury experienced massive swings but rebounded to 2.00% by the end of the week, recovering from a 30bp dip post-invasion. The 5-year treasury faced a similar trajectory last week and finished the week at 1.95%. With a steepening forward curve at shorter tenors and a flattening curve at longer tenors, hedging longer maturities could be significantly more attractive for corporations considering interest rate products.

Inflation expectations and labor trends

U.S. inflation remains elevated based on February’s consumer price index report, released on Thursday. Actual inflation exactly hit market expectations with a sharp 7.9% year-over-year change in inflation, a new 40-year high. In addition, U.S. 5-year and 10-year breakeven rates reached all-time highs this week of 3.52% and 2.94%, respectively. Despite record inflation, the Fed has marginally walked back its aggressive agenda of rate hikes since Russia’s invasion. The number of priced-in 25bp rate hikes by the end of 2022 has decreased from seven to six.

Even amidst the Great Resignation, the labor market remains tight. The Bureau of Labor Statistics disclosed that January had 11.3 million job openings and 4.3 million job quits. However, weekly jobless claims remained relatively low at 227,000, signaling that U.S. employers are struggling to fill in vacancies as employees nationwide search for better opportunities.

The week ahead

People globally will continue to evaluate the ever-increasing intensity of the Russia-Ukraine war. Keep an eye out for the upcoming FOMC meeting spanning from Tuesday to Wednesday, where markets predict a 98% chance of a 25bp rate hike from its current target rate of 0-0.25%. In addition, expect the PPI report on Tuesday and housing start and building permit news on Thursday.

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