What a difference a few hours can make. Markets rebounded strongly at the end of last week as the various splits over sanctions amongst some prompted the not unreasonable view that some European governments weren’t serious on holding Russia to account for its actions over Ukraine.
For example, reports that carve outs had been created for luxury goods and items for the likes of Italy and Belgium sent completely the wrong message and made a complete mockery of the whole sanctions process.
The ground since then has shifted a lot with the biggest shift coming from Germany which not only dropped its opposition to shutting Russia out of the global financial system, by agreeing to sanctions on Russian banks, but it also dropped its opposition to sending lethal weapons to war zones, as well as pledging to spend at least 2% of GDP on defence spending.
The penny appears to have dropped that the short-term costs of doing something economically damaging, like shutting Russian banks out of the global financial system, and freezing Russia’s foreign exchange reserves, could well be outweighed by the costs of doing nothing, further down the line.
Putin appears to have calculated, wrongly as it turns out, that Western governments wouldn’t have the stomach to do what they are currently doing, as Russian banks get shut out of the SWIFT messaging system. The sanctions haven’t ended there either with key Putin himself targeted as well as key Russian officials and oligarchs connected to Putin, while European airspace has been closed to all Russian flights.
This weekend's events now mean that no G7 banks will be able to buy Russian rubles, sending the currency into freefall, with the end result we could see a huge inflationary shock unfold inside Russia. A run on Russian banks inside the country appears to be already starting, as ordinary Russians fear that their credit cards might no longer work.
Global companies have also looked to distance themselves from Russia, with BP announcing that it would be divesting its stake in Rosneft which it has a 20% stake in. This won’t be a cheap decision because they probably won’t be able to sell it to anyone in the current climate and is likely to mean a total write down of $25bn.
BP CEO Bernard Looney will also step down from the Rosneft board along with Bob Dudley. This move by BP will likely mean Shell will face similar pressure to do something similar with its Sakhalin assets, of which it has a 27.5% share.
Oil and gas prices have surged over concerns companies won’t be able to pay for Russian oil and gas, which could well prompt Putin to shut off the supply.
Gold prices have struggled to rally over concerns that Russia might decide to unload some of their gold reserves to raise cash, and help support the ruble, due to the country’s FX reserves being frozen, while the US dollar has moved higher.
In a sign that Putin appears increasingly rattled by the way events have unfolded over the past few days, from the lack of progress on the part of the Russian military in subduing Ukraine, to the increasing polarisation of Russia itself, he took the extraordinary decision to put his nuclear armed forces on high alert.
This comes across as a move that smacks of desperation, but it also puts the world, and Europe especially, into its most dangerous period since the 1980’s at the height of the Cold War.
Despite events over the weekend Asia markets have proved remarkably resilient, however markets here in Europe look set to get clobbered when they open later this morning, while the Russian ruble has collapsed further, trading over 20% lower and now at 107 against the US dollar.
EUR/USD – while below the 1.1270/80 area the bias remains for a lower euro, with the next support at last week’s lows and the 1.1100 area. A break below 1.1100 argues for a move towards 1.1000.
GBP/USD – has slipped below the 50-day MA, slipping to a low of 1.3273 last week before rebounding. Bias remains for further losses towards 1.3160 while below the 1.3460 area.
EUR/GBP – found resistance at the 0.8410/20 area last week but has slipped back sharply in Asia trading. While below resistance at the 0.8410/20 area the bias remains for a move back towards the recent lows at 0.8280.
USD/JPY – found resistance at the 115.80 area last week and has since slipped back. We still have support at the 114.40/50 area.