The ASX is expected to open lower this morning after the Dow Jones Industrial recorded its second worst day of the year and is now perilously close to correction.
We are now heading into the seventh day of the Russian invasion of Ukraine with no signs that is going to cease: the bombings only look to be getting worse.
While this has driven oil prices to levels not since since 2014, its impact on the market is now being keenly felt.
“The oil rally has seriously accelerated today, breezing past $US100 and gathering momentum along the way,” Craig Erlam from OANDA says.
The Dow Jones Industrial Average closed down nearly 600 points, or 1.8%, to 33,294. This was close to the level, 33,119.69, that would put the blue-chip benchmark in correction territory: down 10% from its recent peak. The S&P 500 index was 1.6% lower at 4,306.20, led by declines in financials and the Nasdaq Composite Index fell 1.6% to around 13,532.
Andy McCormick, the head of Global Fixed Income and chief investment officer (CIO) of the Fixed Income Division and vice president of T Rowe Price Group, Inc. says the conflict has exacerbated an already volatile market.
Speaking on how the markets have been affected, McCormick says, “Over the longer term, the scenario where we were hoping this would be a brief incursion is now a much lower-probability outcome. That means supply chain issues and inflationary pressure for a longer period of time. We already see this reflected in oil markets but would expect these impacts to spread to other markets, like grain and other things that are produced in Ukraine or Russia.
“Among the broader impacts of this conflict, the supply chain issues and inflationary pressures will be top of mind for many investors globally. These things will almost certainly complicate the already difficult task that central banks were facing trying to battle inflation.
“The playbook heading into this conflict was, for most developed market central banks, to begin raising rates in the near term - March in the US, for example. The events in the last few days almost certainly muddy the waters for central bankers, making it all the more difficult to engineer a soft landing, which is a difficult thing to do in almost any market environment.
“At this point, we believe that central banks will proceed as planned and rates will begin to increase in March. The picture will be a little more difficult to ascertain as the year rolls on and will really depend on how negotiations and the conflict play out.
As for what to expect next, McCormick says the things to look out for that would trigger concerns of an escalation are:
- The flow of gas and oil out of Russia, which appears to be in the interests of most parties.
- Russia has signaled respect for NATO treaties, so any inclination that there is a conflict with, say Poland, would be a tremendous escalation and trigger a rethink in terms of the global environment.
Here’s what we saw (source Commsec):
- The Aussie dollar fell from highs near US72.89 cents to US72.40 cents and was near US72.60 cents in US trade.
- Global oil prices soared yesterday with Reuters noting that "a global agreement to release crude reserves failed to calm fears about supply disruptions from Russia's invasion of Ukraine, and instead underscored concerns about growing disruptions. Members of the International Energy Agency, which include the US and Japan, agreed to release 60 million barrels of crude from their reserves." OPEC will meet today to decide production quotas.
- The Brent crude price rose by US$3.98 a barrel or 3.9% to US$104.97 a barrel.
- The US Nymex crude price rose by US$7.69 or 8.0% to US$103.41 a barrel.
- Base metal prices rose by between 1.0-3.6% with lead up the least and nickel up the most.
- The gold futures price rose by US$53.10 or 2.8% to US$1,953.80 an ounce.
- Spot gold was trading near US$1,946 an ounce in US trade.
- Iron ore rose by US$5.35 or 3.8% to US$144.45 a tonne.
Australian market
The southeast of Australia is facing some of the worst flooding in the country’s history, with whole towns virtually underwater. It seems we can’t get a break.
Australians endured horrific bushfires just months prior to COVID, with the recovery still ongoing in some regional areas and now ordinary Australians are losing their homes again to rising flood waters.
Not to mention the crippling effect of COVID for the past two and half years.
However, Australians are resilient and watching the community spirit come alive again after so much division is heart-warming.
Our thoughts go out to those who have been hardest hit.
Is Crown’s acquisition in trouble?
Financial crimes watchdog Austrac could derail Blackstone’s $8.9 billion takeover of Crown Resorts Ltd after it accused the entertainment giant of more than 500 breaches of anti-money laundering and counter-terrorism financing laws.
Each breach could cost Crown up to $22.2 million in fines.
Crown needs to be fined $750 million for private equity firm Blackstone to pull out of the deal.
Austrac had previously fined Westpac Banking Corp and Commonwealth Bank of Australia (ASX:CBA) $1.3 billion and $700 million respectively over anti-money laundering breaches.
“Austrac’s investigation identified poor governance, risk management and failures to have and maintain a compliant (anti-money laundering and counter-terrorism financing) program detailing how Crown would identify, mitigate and manage the risk of their products and services being misused for money laundering or terrorism financing,” Austrac chief executive Nicole Rose said.
“They also failed to carry out appropriate ongoing customer due diligence including on some very high risk customers.
“This led to widespread and serious noncompliance over a number of years.”
The 800+ page damnation of Crown comes just after the NSW gaming regulator was set to grant Crown a conditional licence to open its gaming floor in Barangaroo.
Austrac is yet to quantify the penalty, but in a semi-encouraging statement Rose said, “Crown is taking steps towards improving its systems, processes and resourcing, however there is further work to do and Austrac will continue to work closely with Crown to address ongoing compliance concerns.”
In a statement Crown said, “Crown has developed a comprehensive remediation plan which is intended to position Crown as a leader in the industry in its approach to governance, compliance, responsible gaming and the management of financial crime risk.
“The plan is underpinned by an uplifted organisational culture. Crown recognises the importance of complying with its financial crime obligations and has overhauled its approach to managing financial crime risk.”
US market
Leading the declines in the US overnight were financials down 3.7%, while even energy was slightly lower despite a hike in crude oil prices.
Shares in Chevron climbed 4.0% to hit a record high after the oil major raised its share buyback program and forecast for operating cash-flow through 2026.
Shares in retailer Target rose 9.9% on above-market sales and profit forecasts.
Apple Inc (NASDAQ:AAPL) has stopped product sales in Russia
“We are deeply concerned about the Russian invasion of Ukraine and stand with all of the people who are suffering as a result of the violence,” an Apple spokesman said in a statement
"We have paused all product sales in Russia. Last week, we stopped all exports into our sales channel in the country."
The iPhone maker says other services have been limited and Russian state-owned media RT and Sputnik news apps were no longer available for download in its App store outside Russia.
Apple has also disabled both traffic and live incidents in Apple Maps in Ukraine as a precautionary measure for Ukrainian citizens.
Some analysts have said Apple’s hand was forced.
DA Davidson analyst Tom Forte said Apple and some of the world’s other giant tech companies faced a challenging situation.
“It’s a challenge for them on one hand to try to maximise sales and profits and on the other hand try to be good corporate stewards, or do what they think is appropriate given the current conflict,” Forte said.
Forte believes Apple will not be materially affected by its decision to pause sales in Russia.
Irina Raicu, internet ethics program director for the Markkula Center for Applied Ethics at Santa Clara University in California said, “Apple was starting to get called out for its lack of public response, given the broader effort in the hope that economic measures, including sanctions and private business decisions, might help to at least shorten the fighting.”
State of the union
US President Joe Biden will address the nation in his first State of the Union speech.
The President “will lay out specific, practical measures that would reduce costs for families right now, including prescription drug costs and health care premiums, child care and pre-k costs, and energy costs,” according to a White House fact sheet.
He “will point to the other ideas he has proposed on areas ranging from housing to care for seniors and people with disabilities to higher education affordability to direct tax relief for families.”
European market
Fell sharply. Investors remain jittery about the war in Ukraine. Weak earnings results also weighed on sentiment.
Travel & leisure fell by 7.5% in response to closing of airspace and higher oil prices.
Banks lost 6.8%. The pan European STOXX 600 index fell by 2.4%. The German Dax index fell by 3.9% with the UK FTSE index down by 1.7%.
In London trade, shares in Rio Tinto rose by 2.2% and BHP lifted by 1.3%.
Visa (NYSE:V) and Mastercard (NYSE:MA) take action
Visa and Mastercard have blocked Russian banks from payment networks.
"As a result of sanction orders, we have blocked multiple financial institutions from the Mastercard payment network,” Mastercard chief executive Michael Miebach says in a statement.
"We will continue to work with regulators in the days ahead to abide fully by our compliance obligations as they evolve."
Meanwhile Visa stated on its website that it is “taking prompt action to ensure compliance with applicable sanctions, and is prepared to comply with additional sanctions that may be implemented”.
A final note on oil
Morgan Stanley (NYSE:MS) has boosted its average Brent crude price forecasts to $US95 for 1Q and $US110 for 2Q.
Its "bull case" is now $US125 a barrel as "the events in Ukraine have introduced a risk premium in oil prices that is likely to remain in coming months.
"Against a backdrop of market tightness, even small disruptions can have large price impacts," MS analysts say.
Morgan Stanley sees no sign of supply disruption from Russia … yet.
"All the pipeline and tanker tracking data available to us suggests that, as of now, there is no noticeable disruption to the flow of oil from Russia," they say.
"Arguably, this is unsurprising, as sanctions introduced so far have not been focusing on energy commodities.
"However, the oil market is tight…global oil inventories are already low and falling.
"Spare capacity is declining, and on-track to fall below 2 mb/d by mid-year.
"Investment levels are still low by historical standards as well, and the post-covid demand recovery remains healthy, with further inventory draws ahead."
The broker has removed its assumption for production growth from Russia this year, while increasing its year-end forecast for Iran's production from 3.2 to 3.5 mb/d.
"This leaves our balances broadly unchanged in a modest but persistent deficit of about0.3 mb/d this year."