Morning Report: Sanctions start to bite

Vital Statistics:

S&P futures4,327-54.2
Oil (WTI)95.243.63
10 year government bond yield 1.89%
30 year fixed rate mortgage 4.19%

Stocks are lower as markets take stock of the Ukraine situation. Bonds and MBS are up.

The reality of sanctions is begging to be evident in some of the financial markets. The Russian Ruble is in free-fall, trading as low as 110 to the dollar this morning. It entered the year at 75 to the dollar. The US Treasury has banned transactions with the Russian Central Bank, which means that Russia has no tools to manage currency rates, and this will trigger an inflationary wave in the country. Russian sovereign credit default swaps are pricing in a 50% chance of default

Russia introduced capital controls to prevent capital from fleeing the country and hiked its interbank interest rate to 20%. . Russia’s economy is about to collapse and will probably be too small to be included in the G-20 much longer.

Supposedly 3 Russian banks will be banned from SWIFT, which allows banks to transact. This will allow companies who are re-thinking their business dealings in Russia some time to get their capital out. Supposedly the sanctions include a pretty hefty fine, so pretty much every company with exposure there has their lawyers poring over the language and I guess they will choose to err on the side of caution and reduce their exposure.

What does all this mean in the short term? First of all, bonds and stocks will be driven by headlines and not by economic data. Friday’s jobs report will matter, as will Jerome Powell’s Humphrey-Hawkins testimony this week. Things like the ISM, productivity etc becomes less relevant.

Second, oil is going up. The US is going to release some reserves from the Strategic Petroleum Reserve in order to reduce prices. That said, most of the US oil comes from North America, so Russia’s output doesn’t really matter all that much.

Third, whenever you have this sort of financial contagion, you should expect credit to tighten. Hedge funds with big positions are going to get slammed with margin calls. I heard on Bloomberg that a big institution was trying to move a big block of Rosneft stock and there was no bid. The stock has gotten cut in half over the past few days.

Here is a good place for finance geeks to get the latest and greatest of what is going on. Adam Tooze’s substack is on it.

If we start to see credit tighten in the US, then the Fed is put into a bind: It needs to tighten to control inflation, but if credit markets seize up, the playbook is to do the exact opposite. The Fed Funds futures are beginning to reflect this reality. Two weeks ago, the March Fed Funds futures saw a 50% chance of a 50 basis point hike. Today, it is 10%. The December futures are now looking at 125 – 175 basis points in hikes this year. Not too long ago, we were looking at 150 – 200.

Mortgage rates will probably move down only grudgingly as the 10 year falls. MBS investors are going to be more worried about the Fed unloading its book so they are reluctant to stick their necks out too much. I see MBS spreads stable to wider as the market sorts everything out.

Rocket reported fourth quarter earnings last week. Volumes fell 29% and gain on sale fell from 4.41% to 2.8%. Earnings per share fell 71%. Rocket sees margins staying stable or increasing in the second quarter.

17 Responses

  1. I’m sure that there’s not going to be any unforeseen negative consequences of causing the complete collapse of the economy of a country with a large nuclear weapons arsenal.

    This should be the new quote of the moment.

    “This business will get out of control. It will get out of control and we’ll be lucky to live through it.”

    – Admiral Josh Painter, The Hunt For Red October, 1990


    • The ratchet will slowly tighten, and I think time is on the West’s side on this one.


      • I can’t think of a single country that the US has imposed sanctions on to change it’s behavior where the policy actually produced the intended results. The list of failures is long:

        North Korea

        and I’m sure some others, including the pre-existing sanctions on Russia.

        I can think of instances where they have taken asymmetrical actions against the US in response (Iran & kidnapping of Americans)


        • The USSR in 1988 would be immune to sanctions like Cuba, Iran, etc. Nowadays, the financial system is so intertwined that it now has something to lose.


        • Ukraine ranks:

          1st in Europe in proven recoverable reserves of uranium ores;
          2nd place in Europe and 10th place in the world in terms of titanium ore reserves;
          2nd place in the world in terms of explored reserves of manganese ores (2.3 billion tons, or 12% of the world’s reserves);
          2nd largest iron ore reserves in the world (30 billion tons);
          2nd place in Europe in terms of mercury ore reserves;
          3rd place in Europe (13th place in the world) in shale gas reserves (22 trillion cubic meters)
          4th in the world by the total value of natural resources;
          7th place in the world in coal reserves (33.9 billion tons)

          Ukraine is an important agricultural country:

          1st in Europe in terms of arable land area;
          3rd place in the world by the area of black soil (25% of world’s volume);
          1st place in the world in exports of sunflower and sunflower oil;
          2nd place in the world in barley production and 4th place in barley exports;
          3rd largest producer and 4th largest exporter of corn in the world;
          4th largest producer of potatoes in the world;
          5th largest rye producer in the world;
          5th place in the world in bee production (75,000 tons);
          8th place in the world in wheat exports;
          9th place in the world in the production of chicken eggs;
          16th place in the world in cheese exports.

          Ukraine can meet the food needs of 600 million people.

          Ukraine is an important industrialised country:

          1st in Europe in ammonia production;
          Europe’s 2nd’s and the world’s 4th largest natural gas pipeline system;
          3rd largest in Europe and 8th largest in the world in terms of installed capacity of nuclear power plants;
          3rd place in Europe and 11th in the world in terms of rail network length (21,700 km);
          3rd place in the world (after the U.S. and France) in production of locators and locating equipment;
          3rd largest iron exporter in the world
          4th largest exporter of turbines for nuclear power plants in the world;
          4th world’s largest manufacturer of rocket launchers;
          4th place in the world in clay exports
          4th place in the world in titanium exports
          8th place in the world in exports of ores and concentrates;
          9th place in the world in exports of defence industry products;
          10th largest steel producer in the world (32.4 million tons).

          NOT SOME GODFORSAKEN SANDHILL. Probably worth integrating into the EU, after Putin eventually fails [assuming a long time attempted occupation, a long time resistance, and long time resupply lines and sanctions rom the west weaken Russian resolve before everyone is dead].

          Weighing the risk that a dictator who seems determined to be an aggressor has a more limited goal than he has stated in the past will be less dangerous if he is capitulated to or if he is confronted is beyond my ability to compute. But the past experience with espansionist dictators favors confrontation, I think.


  2. I guess the sanctions will matter more than they would have during the Cold War. The USSR an China were already cut off from world markets, so they had nothing to lose.

    I think China will be watching this closely. They have a lot more to lose economically. Especially since they have a massive real estate bubble.


  3. The NYT starts to get it:


    • Former President Donald J. Trump’s brand of populism has been widely viewed as an appeal to white voters.

      And by “widely viewed” they mean “widely portrayed by us in order to get you to view”….


      • Yes. Because they don’t want to be honest and characterize it as an appeal to working class voters while the left is abandoning any pretense of being pro-working class.

        Nor would they mention the only cohort Trump lost voters in was white, college-educated males.


  4. What’s happening with the Russian banks right now seems to be making the best possible case for crypto for the average person.


  5. Aside from what Brent reports here, I suggest these sources:

    1] The WSJ seems more current and has far more breadth than the WaPo or the NYT.
    H/T Scott.

    2] The Economist, Bloomberg, and provide overviews of the economic effects with material I don’t see anywhere else.

    For example, the active fleet of US controlled LNG tankers is @76, at any given time, which had been virtually dedicated to supplying Asian markets, but now about 30 appear to be diverted to Europe.

    3] and CNN and PBS have the most video correspondents on the ground, I think.

    I welcome your suggestions in turn.

    JNC, I will touch base with Lulu. This week is very busy again. Later!


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