Pre-market stock: War in Ukraine leads to Fed options crowd

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The Chairman of the Federal Reserve, Jerome Powell, has made himself very clear: To fight inflation, the US central bank will begin to reduce support for the economy in the era of the crisis. very soon. but then Russia’s invasion of UkraineWall Street is not convinced that the Fed will have the same resolve to move forward aggressively.

What’s happening: Bets have subsided that the Federal Reserve will announce an excessive rate hike when it meets later this month. A week ago, traders saw a 34% probability of a 0.5 percentage point increase. Now, they estimated the probability at less than 8%, according to Data from the CME group.

“The near-term effects of the crisis appear to be inflationary, but the blow to growth is harder and puts central bankers in a very difficult position,” said Michael Schumacher, head of macro strategy at Wells Fargo Securities.

Powell is scheduled to testify semi-annually before the House Financial Services Committee on Wednesday. at prepared notesHe said the Fed is ready to raise interest rates in March even though the conflict in Ukraine is adding to near-term uncertainty.

Powell did not specify the size of the height. Schumacher believes he will “strongly hint” on Wednesday that the Federal Reserve will raise interest rates by 0.25 percentage points.

Others think he will look to keep all options open given how quickly the situation in Ukraine is evolving.

“Once markets stabilize, the main impact on the Fed from geopolitical tensions will be renewed inflationary pressure through higher energy prices and newly disrupted supply chains,” Citigroup’s team told clients. The bank believes that Powell will leave the option for a bigger hike “on the table”.

The breakdown: Powell’s testimony will be an important opportunity to provide investors with some clarity after last week’s turmoil.

Attention will not only be on the outlook for interest rates, but also on the future of the Federal Reserve’s massive bond-buying program, another lever it uses to prop up the economy. The Federal Reserve is set to end purchases of tens of billions of dollars in securities early this month.

However, the war in Ukraine put the Central Bank in a difficult position. Energy prices and more Commodities like wheat, a major export from Russia and Ukraine, is on the rise. This could affect global economic growth if it pushes consumers to back away from spending.

This means that the Fed must be careful about raising interest rates or taking steps to reduce holdings on its balance sheet, should it cause a new recession or market turmoil.

At the same time, high inflation is exactly what policy makers were most concerned about, and this is how many economists felt Already accused the Federal Reserve of being behind the curve. US President Joe Biden said during his State of the Union address on Tuesday that fighting inflation is his business “Top priority.”

This is why the path ahead is so vague. Robert Sears, chief investment officer at Capital Generation Partners, said that if there is any indication that markets are not functioning normally, the Federal Reserve may begin to increase its balance sheet of about $9 trillion again.

“Any contagion risk in the system, you’re likely to see balance sheets expand,” Sears told me. “There is a will to support the system.”

Global crude oil prices jumped to more than $110 a barrel and the cost of natural gas soared to a new record in Europe on Wednesday as Russia’s escalating military campaign in Ukraine frightened markets.

Brent crude futures, the global benchmark, rose nearly 6% to $110.90 a barrel at 5:30 AM ET. US oil futures were trading at a slight discount at $109.30 a barrel. In Europe, the wholesale price of natural gas rose by 60% to a record 194 euros ($215) per megawatt-hour.

Russia’s energy wealth has not been directly targeted by Western sanctions imposed in the wake of the invasion of Ukraine. But Moscow is finding it more difficult to sell shipments of Russian crude oil to traders and refiners who are worried about falling into the repercussions of sanctions targeting the financial system.

Tanker operators are concerned about the risks to ships in the Black Sea, and major international oil companies are abandoning their operations in the country.

Russia’s main grade Urals oil traded at a discount of $18 a barrel to Brent crude on Wednesday as buyers avoided Russian exports, according to analysts at Commerzbank.

“The differences in oil prices reflect a clear unwillingness to take Russian crude, and there is still [a] “The risk of further sanctions that could indirectly or directly affect oil purchases or supplies,” said Shane Kim, head of oil supply and production analysis at Standard & Poor’s Global Commodity Insights.

Natural gas from Russia to Western Europe continues to flow normally, according to Alex Frulli, market analyst at The Independent Commodity Intelligence Services. But there is “a lot of uncertainty and anxiety about how things might change,” he told me.

what happened after that? The massive price increases come despite the West’s efforts to calm the markets. On Tuesday, the United States and 30 other members of the International Energy Agency allowed the release of 60 million barrels of emergency oil reserves, which will cover nearly two weeks of Russian oil shipments.

The Organization of the Petroleum Exporting Countries (OPEC) is due to meet on Wednesday with allied producers, including Russia, as the group is under heavy pressure from the West to dramatically increase production. But the Saudi government said on Tuesday it believed that OPEC+ should stick to its plan to gradually increase production.

Two of the world’s largest container shipping companies have halted freight bookings to and from Russia, another strain on the country as its economy comes under massive pressure from Western sanctions.

“As the stability and safety of our operations are already directly and indirectly affected by the sanctions, new Maersk bookings to and from Russia will be temporarily suspended, with the exception of food, medical and humanitarian supplies,” shipping giant Maersk said in a statement. Tuesday.

The company added: “We are deeply concerned about the continuing escalation of the crisis in Ukraine,” noting that it has begun “to see the impact on global supply chain flows such as delays, the seizure of goods by customs authorities through various shipping hubs, and unexpected operational effects.”

MSC, a Swiss-owned container shipping line, said it will stop all bookings for shipping to and from Russia from Tuesday.

Why it matters: These companies were not required to suspend sailings under the sanctions that Western countries have imposed on Russia. But it is yet another sign that companies are finding it in their interest to sever commercial ties with the state. There are risks to their institutional reputation, and concerns about receiving payments from Russian banks under pressure.

The shift from shipping companies will also add pressure on the Russian economy, preventing major imports of goods.

“The country is now cut off from a huge slice of the world’s shipping capacity,” Susanna Streeter, an analyst at Hargreaves Lansdown, said in a research note.

Abercrombie and Fitch

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(AEO)And Snowflake and Victoria’s Secret follow after closing.

Also today: Federal Reserve Chairman Jerome Powell testifies before the House Financial Services Committee at 10 AM ET.

Tomorrow comes: Best Buy earnings

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