On Friday 1 April the markets are up slightly, in an unstable, volatile and irregular environment. The uncertainties surrounding the negotiations between Russia and Ukraine weigh heavily, the leap in inflation which in the second half of the year risks leading to a recession and the rapid changes in the global geopolitical axis, accelerated by the conflict in Ukraine. In Asia, the lists are mixed, in the wake of Wall Street’s closing in the red, which for the first time in two years ends the quarter down by 5%, albeit rising by 3.5% in March.
The price of oil also fell sharply after the massive release of strategic reserves by the United States. WTI drops below $ 100 in Asia, after closing down 7% in New York, while Brent falls below $ 105 a barrel. The Tokyo and Hong Kong stock exchanges are down, while the Shanghai one, in contrast to the trend, is up. In the megalopolis of Shanghai, the authorities have extended the lockdown by ordering many of the inhabitants of the most populous city in China to stay indoors for as long as it takes to curb Covid infections.
Futures on Wall Street are up by about half a percentage point after closing in the red, weighed down by the stalemate in negotiations between Russia and Ukraine and by the surge in inflation, with the PCE, the index most followed by the Fed to guide its policy currency, rose 6.4% annually, the highest level since 1983. Futures on the EuroStoxx 50 are also growing, after the stock exchanges in Europe closed badly in the last session of March, marking the first quarterly decline from early days of the 2020 pandemic.
The main factor was the generalized rise in inflation, which in March soared in Italy by 6.7%, in France by 4.5%, in Germany by 7.3% and in Spain by almost 10%. Meanwhile, in the US, yields on 2- and 10-year Treasuries have reversed for the first time since 2019, sending the signal of a possible recession coming in the coming months. The 10-year rate dropped to 2.331%, while the two-year rate stood at 2.337%. After the brief reversal, both yields paired around 2.34%.
The 5- and 30-year Treasury yields also reversed last Monday, but this reversal in 2- and 10-year rates is much more significant for the markets. On the energy front, Brent and WTI lost about 13% this week, the top in 2 years.
Today the meeting of the IEA, the International Energy Agency, is expected to discuss a further emergency oil release, which would follow the agreement of last March 1st to release about 60 million barrels. Today’s meeting comes after President Joe Biden yesterday announced a release of 1 million barrels a day for six months starting in May. This is the largest release in history by the US Strategic Petroleum Reserve.
The goal is to lower the price of oil to compensate for the drop in crude oil supplies from Russia. Furthermore, Washington also had to make up for the lack of role of price calmer of OPEC +, the organization of crude oil producing countries, which also includes Saudi Arabia and Russia, which yesterday ignored the requests to ease the pressure on prices, merely adjusting the increase in its crude oil production a little.
Negotiations between the Russian and Ukrainian delegations should resume today, waiting for Turkey to bring together the two foreign ministers, Sergei Lavrov and Dmytro Kuleba, to restore breath to a negotiation that is currently stalled. The long-awaited virtual meeting of Charles Michel and Ursula von der Leyen, presidents of the Council and of the European Commission, with Chinese President Xi Jinping and Premier Li Kequiang will also be held.
During the day, March data on the US labor market will be released, those on inflation in the Eurozone in March, expected to rise from 5.9% to 6.7%, the interventions in Cernobbio by Isabel Schnabel and Klass Knot, two exponents of the ECB considered more ‘hawks’ than ‘doves’ and, in the evening with US markets closed, Moody’s will release its assessments on Italy’s rating and outlook.
Putin’s hard line on gas
Russian President Vladimir Putin goes straight: from today Western companies will have to pay for Moscow gas in rubles and to do so they will have to open an account in local currency at a Russian bank. Yesterday Putin signed the decree establishing the new obligation. “Nobody is selling us anything for free, and we will not do any charitable work either. This means that existing contracts, in the event of non-payment of gas in rubles, will be terminated,” he said. “The US is trying to push Europe to buy American gas, which is more expensive” than Russian gas, Putin added.
Europe and the G7 have already said they have no intention of meeting Moscow’s demands. And Germany and France are also preparing to seek alternative sources. “We have to take all scenarios into consideration, we have to prepare ourselves because tomorrow there may be no more Russian gas,” said French minister Bruno Le Maire, speaking alongside German colleague Robert Habeck.
“We must not give a message that we are being blackmailed by Putin,” Habeck said. “Contracts must be respected,” he added. In Amsterdam, gas prices jumped yesterday to 127 euros per MWh, before falling back to 123 euros.
Last Wednesday, the Kremlin spokesman made it clear that the deadline of March 31 would not be mandatory to trigger the new measures because adoption would take some time, but Putin’s statements have in fact denied it. Meanwhile, Brussels has made it known that “for the moment no problems with the security of supply” of gas have been reported.
Moscow is saving the ruble but is isolating itself economically
Moscow managed to remedy the collapse of the ruble, which fell to 140 against the dollar at the beginning of March, immediately after the introduction of sanctions. On March 31, the ruble rose to around 81 per dollar, in line with the values of last February 22, two days before the invasion, when it was at 80 per dollar. Revenues from oil and gas, which cover around 30% of revenue, helped stabilize the currencywhile exports continue to flow to Europe and prices soar.
But the strict limits that Moscow introduced to support the ruble’s value were crucial to averting a deeper monetary crisis. Elina Ribakova, an IIF economist reveals to the Financial Times that Russia’s current account surplus could probably reach 200-250 billion dollars in 2022 from about 120 billion dollars in 2021, thanks to export revenues.
Thanks to these revenues, Ribakova estimates, Russia could rebuild its central bank’s reserves, frozen by sanctions, in just over a year. Russia’s central bank spent about $ 1.2 billion, a relatively modest amount, to support the ruble in the two business days following the invasion, and hasn’t intervened in the currency markets since, according to the FT.
Analysts also believe that Putin’s plan to force European gas buyers to pay in rubles could provide a further boost to the currency. However, Ribakova estimates that Russia’s GDP will shrink by 15% this year, wiping out a decade and a half of growth, as a result of sanctions on oil sales and the collapse of domestic demand.
The EU-China summit
The leaders of the EU and China meet for a “difficult” virtual summit. Normally these days Brussels and Beijing talk about bilateral relations and economic cooperation, but this time the usual face-to-face will concern the war in Ukraine and relations with Moscow and will be at the highest level, as Charles Michel and Ursula von der Leyen will confront each other, presidents of the Council and the European Commission, with Chinese President Xi Jinping and Premier Li Kequiang.
If for most of the world the ongoing conflict in Ukraine is “the war waged by Russia”, for China, which does not speak of “invasion” or “conflict”, it is a “Ukrainian crisis”. Beijing will most likely invite the EU to become more independent from Washington, insisting that sanctions are more convenient for Americans than for Europeans.
However China has no interest in the war lasting too long, because Ukraine has a nerve center on the ‘New Silk Road’ and because it does not want the United States and Europe, its number one and number two customers, to suffer too much damage. The two European leaders will instead insist that war is not in China’s interest and will also clarify that arming Russia or helping it to dodge sanctions “will have consequences for EU-China relations”.
So far, Beijing has refused to pressure Russia, or to speak to Zelensky. It therefore remained neutral, condemning the invasion and sanctions. However, for the West, if China were to help Russia, or attack Taiwan, sanctions against Beijing would be a difficult problem to solve.
Russia is a mid-tier economy, accounting for around 3% of the world’s gross domestic product, whose strength is based on its natural resources and military might. China, on the other hand, is the second largest economic superpower in the world and accounts for 18% of global GDP. Punishing it like Russia, or like Iran could lead to economic catastrophe, because it is too big to be sanctioned. For this reason, today’s will be a difficult confrontation.