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Market Update

Russian invasion of Ukraine persists

March 7, 2022
  • Joe Rock headshot


    Joseph Rock

    Treasury Advisory

    Corporates | Denver, CO


Economic warfare is waged as the Russian invasion of Ukraine shows no signs of slowing down, sending waves of volatility across global markets. Strong job growth in the U.S. and an optimistic economic outlook from the Federal Reserve take a backseat to the geopolitical crisis.

Countries throughout the world felt the tides of war as the Russian invasion of Ukraine continues to dominate headlines. The rapidly evolving escalation impacted interest rate, currency, and commodity markets. Substantial economic sanctions imposed on Russia by major world players further exacerbated volatility to local economies. Hundreds of billions of Russian assets held abroad were frozen, top Russian banks were disconnected from SWIFT, and discussions of a full western embargo of Russian oil and gas heated up.

Commodity markets

As Russia exports the most crude oil behind Saudi Arabia, worries accelerated crude futures to $130 a barrel Sunday night — reaching the highest levels since 2008. Prices soon fell as Germany signaled hesitation towards a ban on Russian energy imports. Additionally, the International Energy Agency, comprised of the U.S., much of Europe, and Japan, pledged to release 60 million barrels to curb the high prices driven by the invasion. Important to note, worldwide consumption is estimated to be 88.5 million barrels per day according to a study. On Monday morning, WTI also reached $120, its highest level since September 2008. Other key commodities like natural gas, wheat, and LME aluminum have also seen steep price hikes.

Foreign currency markets

Currency markets also felt immense pressure. Concerns of settlement risk loom as the Russian ruble plunges to all-time lows versus the dollar and Euro. Moody’s downgraded the long-term Russian government debt rating from Baa3 to B3 — a firm junk rating. Some banks have suspended RUB trading (including NDFs). However, a few providers continue trading, subject to discussions and approvals. The situation is dynamic and banks can refuse to trade at any time. Liquidity has proven challenging for participants. In the NDF space, the Moscow Exchange (MOEX) USDRUB fixing, the most popular fix used for USDRUB NDF settlement, has fallen below the USDRUB spot trading range on certain days. This suggests that the USDRUB NDF market is dislocated, and hedges may not fully offset economic gains/losses.

Despite the immense hits to Russia’s pockets, Russian President Vladimir Putin has shown no signs of changing the Russian agenda. Having a defined risk management program is imperative to navigating the tides of an ongoing geopolitical crisis. While risk management tactics should be fluid, a risk management strategy should provide guideposts regardless of market conditions.

Rate hikes on the horizon

Despite the global volatility, Fed chairman Jerome Powell suggests the Federal Reserve will stay the course and implied a 25bps rate hike coming in March. 98% of the market is now predicting just one rate hike in March and a 33% chance of six rate hikes by the end of the year, according to the FOMC rate expectation on FedWatch Tool. Curbing historically high inflation remains a top priority.

It’s important to note that the market historically underpredicts the speed of rate hikes during a tightening cycle. While the market expects aggressive rate hikes, the historical precedent suggests that reality could potentially be even more aggressive. Fortunately, there are several approaches to managing interest rate risk in an aggressive tightening environment.

Strong jobs report fails to tilt markets

According to the Bureau of Labor Statistics, the U.S. gained 678k jobs in February, beating expectations of +420k. December numbers were revised up from +510k to +588k and January numbers were revised up from +467k to +481k. The unemployment rate fell from 4.0% to 3.8%. The strong jobs report brings the U.S. within reach of the pre-pandemic employment levels — just short by 2.1 million jobs. Despite the strong numbers, markets were more reactive to the latest out of Ukraine as the 10-year Treasury started Friday down over 10 basis points, with stocks down as well.

The week ahead

The world will continue to closely monitor the Russia-Ukraine crisis. Markets are expected to sharply react to the latest developments in sanctions and geopolitical developments. No Fed officials are expected to speak next week, but job openings and quits, key inflation data, and the federal budget deficit are expected to be released.

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About the author

  • Joseph Rock

    Treasury Advisory

    Corporates | Denver, CO


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