Free Market Sanctions: Oil Purchasers & Corporations Suspend Business With Russia

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(Wednesday Market Open) S&P 500 futures are pointing to a higher open as support around the 4,300 level appears to be holding despite another spike in oil prices. Last night, President Joe Biden offered his state of the union address; today investors will hear from Federal Reserve Chairman Jerome Powell who is scheduled to testify before Congress.

This morning the ADP Nonfarm Employment report showed more jobs than expected were added in February, and the January number was revised higher as well. Most jobs were added by medium and large companies, while small companies were net negative. Leisure and hospitality were the top hiring companies once again.

Crude oil futures were trading near $109, or about 5.4% higher, as many oil buyers are shunning Russian oil. Even if purchasers want Russian oil, shipping is being disrupted because of the difficulty in getting tankers into Russia. Overnight, oil prices tested $110 per barrel, which is actually a long-term resistance level going back to 2014. If resistance holds for oil and support holds for the S&P 500, stocks could start to be build a bit of base.

Wednesday was an eventful day in the markets with a number of new developments signaling potential changes in market sentiment. Investors may be getting less concerned about inflation and more concerned about economic slowdown as companies deal with uncertainty around Russia continuing to push into Ukraine. While President Vladimir Putin tried to learn from the sanctions slapped on Russia after invading Crimea in 2014, apparently there were holes in his plan to “sanction proof” the Russian economy. Let’s break down what the markets are doing and potential reasons why.

Currencies

One thing Mr. Putin attempted to do was protect the Russia’s trade and currency by divesting away from the U.S. dollar and stockpiling other country currencies. However, the sanctions, particularly those around SWIFT (Society for Worldwide Interbank Financial Telecommunications), which helps facilitate payments in other countries, are blocking Russia from its ability to trade and raise capital. Additionally, many Russian assets have been frozen by western allies.  

Russian and Ukrainian citizens are attempting to protect their personal funds by changing in their rubles for other currencies, which may be behind the recent surge in bitcoin. The Russian ruble has lost a tremendous battle against the dollar, and now the ruble is worth less than one U.S. cent. With many of its other assets frozen, the Russian government may be finding it difficult to function.

Commodities

As previously noted, Russia is the 11th largest economy in the world behind countries like South Korean and Italy. However, it’s a big player when it comes to commodities because it’s the third-largest producer of oil and among the top in other commodities. While western allies tried not to disrupt Russia’s important commodities, the financial sanctions have created an unintended consequence of making it harder to get them. This is causing some commodities to rally.

WTI crude futures rose $9 or about 9.4%, pushing the American benchmark crude near $105 per barrel. Brent crude futures also shot up over $105, or 8.21%. However, this isn’t just because of the payment systems. English oil producers Shell (SHEL) and BP (BP) have decided they would no longer do business in Russia because of the invasion. Shell and BP were joined by Exxon (XOM) on Wednesday morning when Exxon announced it will stop projects in Russia too.

Other petroleum products also rose on the news including RBOB gasoline futures, which shot up 6.38% on Tuesday. These gasoline futures have risen 60% from their December low. Additionally, natural gas futures rose more than 4%, while heating oil futures gained 8.72%. Rising oil prices booted the energy sector, which was the only one to finish the trading session in the green.

With that said, there’s some hope for consumers worried about rising gas prices. The oil markets are signaling that the rise may be temporary. Oil futures are experiencing a phenomenon called backwardation, which means the current month futures contracts are higher than later months. This suggests that the commodity market doesn’t expect these prices to last past a month or two.

Outside of petrol, wheat futures are at their highest levels since 2008 because Ukraine and Russia are large wheat exporters. Even though no one was looking to sanction Ukraine wheat, the Russia invasion is blocking supply chains. Wheat futures rallied 5.35% on Tuesday, adding to its six-day, 24% rise.

Finally, many investors are moving into precious metals as a safe haven. Gold futures rallied 2.44% on Tuesday, while silver futures rallied 4.84%. Even copper futures, which are usually seen more as an indication of economic strength than a safe haven, rallied 2.56%. The Gold & Silver Index (XAU) saw precious metal companies rise an aggregated 4.59%.

Bonds

Speaking of safe havens, investors flocked into U.S. Treasury bonds, particularly in longer-term maturities like the 20- and 30-year bonds. But it wasn’t just Treasuries; highly rated government bonds saw a lot of buying around the globe including German bunds. The 10-year German bund fell from a yield of 0.11% to -0.091% (that’s correct, negative yields). The U.S. Treasury 10-year yield fell from 1.839% to 1.707%.

Falling global yields complicates the inflation picture because the Federal Reserve is less likely to be aggressive against inflation while the United States and its allies are tied up in a conflict with Russia. However, inflation is still high, and rising commodity prices may not provide any relief, even if the uncertainty surrounding the Russia causes the economy to slow.

The bond markets are already lowering the probability of the number of times the Fed might raise the discount rate. Currently, the market is still pricing in hikes for March and May and almost certainly June. However, past that time frame, the probabilities are getting smaller. Unless the February Consumer Price Index (CPI) comes in at a crazy high number, it’s unlikely that the Fed will raise rates half a point in March and just stick to a more conservative quarter-point raise.

On a slightly positive note, the yield curve ratio did steepen a little on Tuesday. The 2s10s spread has moved recently moved down to 0.4 from about 0.8 at the first of the year. A ratio of 0.0 is a completely flat curve, and a negative ratio is an inverted curve and often a harbinger of a recession. Investors are now wrestling with the risk of economic slowdown caused by the war and rising inflation and commodity prices.

The falling yields continue to weigh heavily on the financials sector. The Financial Select Sector Index fell 3.71% on Tuesday and is down about 9.6% from its February high. Bank stocks have been a big drag on financials. The PHLX Bank Index dropped 5.72% on the day. The problems aren’t just in the United States, the KBW Nasdaq Global Bank Index fell 4.04% on Tuesday and is down more than 10.5% in the last five days.

Russian Exposure

Companies that do business in Russia have been selling as investors try to assess the geopolitical risk in their portfolios. According to Barron’s, PepsiCo (PEP) generates 4% of its total sales from Russia. There, it outsells competitor Coca Cola (KO), which only gets about 1%. PEP has fallen more than 3.5% in the last two days, whereas KO is down about 1.4%.  

Pepsi isn’t the only company with Russian exposure. A list by JP Morgan (JPM) included 25 companies that do a lot of business in Russia including McDonald’s (MCD), Mohawk Industries (MHK), Philip Morris (PM), Arconic (ARNC), and more. Geopolitical risk is just one of many risks that can’t always be accounted for when selecting a stock.

This morning, Boeing (BA) has joined a growing list of companies that will stop doing business in Russia. BA has suspended service and operations in Russia as a response to the country’s invasion. Delta Air Lines (DAL) announced on Friday that it was suspending its “codeshare services” with Russian airline Aeroflot. Outside of airplanes, Disney (DIS) announced that it will delay the release of new Russian films on its Disney+ streaming platform. FedEx (FDX) and United Parcel Service (UPS) have both halted shipments to Russia. The list continues to grow as the private market creates its own sanctions. 

CHART OF THE DAY: YIELDING GROUND. The 10-year Treasury yield (TNX—candlesticks) broke support on Tuesday. Data Sources: ICE, S&P Dow Jones Indices. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Earnings Today: Discount retailer Dollar Tree (DLTR) heads a list of lesser known companies announcing earnings on Wednesday. DLTR was able to report excellent earnings despite missing on revenues. The company raised its earnings guidance for its fiscal year.

Earnings Last Night: After the close on Tuesday, Salesforce.com (CRM) rallied 3.65% in extended-hours trading after soundly beating on earnings. However, the company may have trouble hanging on to these gains on Wednesday because it offered a mixed outlook on earnings.

However, SoFi (SOFI) rallied more than 20% in after-hours trading. SOFI recorded a smaller-than-expected loss and higher-than-expected revenues. The fintech firm turned banking institution is projecting that its in-house bank will start boosting earnings results next quarter. The company increased its operating income projections by about $33 million for the full year.

Tuesday’s Earnings: Earnings reports on Tuesday included Target (TGT) announcing better-than-expected earnings on lower-than-expected revenues. Despite the miss on revenues, Target provided an upbeat outlook that helped the stock rally 9.84%. It also appeared to help other stocks like Dollar General (DG), which gained 1.37%, and Costco (COST), which rose 0.71%.

Clothing retailer Kohl’s (KSS) reported record earnings and rallied nearly 8%, but it sold off throughout the day to close 2.12% higher.

AutoZone (AZO) beat on top and bottom line numbers and rose 2% ahead of the bell on news that the company saw 32% growth in commercial sales and opened 25 new stores last year. However, after a volatile day of trading, the stock closed 2.49% lower.

Monday After the Close: Pandemic favorite, Zoom (ZM) reported that it beat on profits and revenues. But ZM fell 7.41% on Tuesday in response to a lower outlook for revenue and earnings guidance for its 2022 fiscal year. The company projected little growth for the next year, but it still announced a $1 billion stock buyback program.

Business software company, Workday (WDAY), reported better-than-expected earnings and revenue and rallied 4.92%. The company saw “an unexpected acceleration” in business, leading to a 21.6% increase in revenues.

A couple of electric vehicle makers also announced earnings. Lucid Motors (LCID) missed on top and bottom line numbers. Additionally, the company lowered its production guidance from 20,000 cars per year to just 14,000 per year; the company is having trouble getting the quality of ingredients needed for items like glass for windshields, and it doesn’t want to sacrifice quality for quantity. However, LCID is looking to build another plant in Saudi Arabia. The stock lost 13.77% on Tuesday.  

Canoo (GOEV) also reported earnings after the close and missed profit estimates by reporting a bigger-than-expected loss. GOEV dropped 4.7%.

Image sourced from Unsplash

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.

TD Ameritrade® commentary for educational purposes only. Member SIPC.