The last two years have seen metamorphosis of risks impacting the global ecosystem with epidemiological threats triggering central bank action through stimulus programs to cushion disease induced credit risks. This was an intervention measure to keep growth in check at a time its erosion had accelerated as the COVID19 threats intensified through supply disruptions and business closures across various industries. Over and above the highlighted risks, the world still grapples with the climate change threat which has been overshadowed by the current state of affairs but also needs urgent action. If no action is taken the globe risks losing close to $10 trillion of Gross Domestic Product by 2030.
Epidemiological and climate risks were earlier said to be the top two global hurdles competing for fiscal share of wallet impacting fiscal positions of sovereigns and attainment of Sustainable Development Goals – 2030 respectively. While pandemic threats have subsided, inflation is another global quagmire from liquidity stimulus interventions in the financial system whose effects just got amplified by geopolitics, in the wake of the war between Russia and Ukraine. Another pocket of geopolitical pressure are the nuclear talks between Iran and the West that have hit a deadlock.
A Gazprom gas plant in Slavyanskaya of Leningrad
ENERGY MARKET IMPLICATIONS OF SANCTIONS LEVELED ON THE WORLDS SECOND LARGEST CRUDE PRODUCER
Russia is the worlds second largest crude producer, a member of the OPEC+ and major supplier of gas to Europe. Russia has a plethora of sanctions leveled against it ranging from SWIFT cut off for its banks to ones targeting its life blood, oil exports. Russia’s invasion of Ukraine triggering war has sent Brent and West Texas Intermediate prices to highs last seen in 2008. A week ago crude did flirt with record highs of $139 a barrel intraday on frets around acute supply shock concerns but later eased to $112 a barrel after the Middle East did committed to ramping up production to absorb the supply constraint forecast. Last week the US headlined 40 year high inflation of 7.9% while England’s Consumer Price Index (CPI) rose the fastest in 30 years to 5.5% while other nations such as Germany exceeded 5.1% close to a 30 year high as Japanese CPI perked above 1.0% as energy prices continue to weigh.
Nations voting against the Russia Ukrainian war at the UN General Assembly in New York.
Geopolitics involving the Russia – Ukrainian war has the greatest dent on energy – petroleum and gas – and agro commodities – soya and fertilizer. Sanctions on Russia being the world’s second largest liquid gold (oil) producer has implications on supply of crude which markets are constantly pricing in. The West is determine to cut off Russia’s life blood but that is sending energy prices through the roof as inflation starts to exacerbate. Russia does supply the work with key ingredients for fertilizer manufacture such as potash. Crude is a very key driver of fertilizer production and an uptick in pricing does scale fertilizer costing soaring agro – input inflation.
A potash mine in Russia. The war is said to impact fertilizer prices through high crude pricing.
ODDS OF CENTRAL BANK RATE HIKES KEEP SCALING BY THE DAY
The complexity of the Russia – Ukrainian war autopsy effects on the energy markets could intensify rate hiking pressure on central banks globally top curb inflationary headaches. Before the war inflation from excess liquidity and rising energy prices from economies reopening was informing rate decision committees to commence the rate hiking cycle. The US Fed was forecast to commence its upward rate adjustment in March while others such as the Bank of England already started.
Bank of England Governor – Andrew Bailey has raised rates 0.25% to counter rising inflation.
SA Reserve Bank Governor – Lesetja Kganyago. Because of global inflationary pressure SA could see its largest rate hike soon.
The recent war in Europe triggering a series of sanctions that have sent energy prices a mile higher could see more central banks tighten rates more aggressive should the risk of inflation persist. Emerging Markets such as South Africa could see the largest rate hike coming as a strengthening dollar weighs.
The world continues to see demand for gold as safe haven in a time of uncertainty. Gold prices exceeded the $2,000oz mark.
The world continues to see a risk on environment in the commodity faculty as positions in crude continue to be taken while for other base metals such as copper and nickel continue to see bulls in price.
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Asset sell off pressure in emerging and frontier markets is likely with capital flight into dollar denominated assets such as US treasuries and gold fetching for over $2,000 an ounce. It is also said that the war could make copper a safer haven supported by its upward price trajectory on the London Metal Exchange and this could see acceleration of investment projects to leverage the opportunity should the war persist.
The unfortunate effects of the war and a rate hike cycle is a strong dollar that will weaken emerging and frontier market currencies. But for respective central banks in these jurisdiction, monetary policy stance will be affected immensely. Other challenges the current state of the world is bringing include potential trade war between US and China indirectly but the war is said to be a lesson to China which could make it rethink its invasion of Taiwan. Sanctions are becoming the biggest threats to growth in an integrated world.
On the upside, oil producing nations will leverage off record prices to widen export revenues and balance fiscal deficits while importers will bear the brunt of import cost pressure. The upside externalities will trickle to base metal mining nations such as the Democratic Republic of Congo and Zambia whose red metal prices have been persistently healthy and could escalate further of soaring demand.
The Kwacha Arbitrageur
