Russian oil embargo discussed as Russian atrocities continue in Ukraine

Market movers today

The single most important key driver for markets is still the Russian invasion of Ukraine and the rising talk of an oil embargo (see below).

On the data front we get factory orders and retail sales for January in Germany as well as the Euro Sentix index this morning. But until we get activity data that cover the time from when the war broke out, they will be of limited relevance.

Tomorrow focus returns to inflation with US CPI for February and on Thursday, the ECB meeting will take the centre stage.

In Scandi, we have Norwegian manufacturing production today and Norwegian CPI Thursday. Sweden releases industrial orders and monthly GDP this week.

The 60 second overview

Russian oil embargo: The focus on the oil market will continue this week after US Secretary of State Antony Blinken over the weekend said that the US and its allies are actively discussing an embargo on Russian oil. Brent oil jumped further this morning on the news and the Brent front-contract is now quoted above USD 129 a barrel up more than 11 USD from the Friday's close. The market already last week started to price a high probability that Russian oil will not be available for the world market in the foreseeable future and buyers are desperately trying to get hold of physical non-Russian oil. The extreme tightness in the spot-market is visible in the very steep backwardation in the front of the oil curve with the two front-contracts trading with a record high USD 5.5 spread. 

Even though some Russian oil indirectly will find its way to the world market e.g. through China and India, a Western embargo of Russian oil will almost inevitably push prices higher and be hurtful to the Russian economy.

Russia is the world's second largest crude oil exporter (5 mb/d) after Saudi Arabia. If we include oil products, exports are a stunning 7.8 mb/d. The global oil market is roughly 100 mb/d. Hence, the impact on different product markets s pronounced. We see that Iranian oil production is rising and the US is stepping-up contacts with Venezuela. Media are also reporting that Blinken will visit Saudi Arabia this spring to persuade the Kingdom to step up oil production. But even if Iranian and Venezuelan sanctions are lifted and OPEC steps up production it will be almost impossible to replace the Russian oil for the time being. The market also at the moment has to deal with falling Libyan oil production.

IMF warning on global growth: The IMF warned over the weekend that the war in Ukraine, the sanctions on Russia and the rise in commodity prices are creating an adverse shock to global economy. The IMF underscored it is critical for monetary authorities to carefully monitor the pass-through of rising international prices to domestic inflation, "to calibrate appropriate responses". We agree with the IMF that the most important channel from the crisis in Ukraine to the global economy is through higher inflation as export to Russia remain limited, see also our update on the Eurozone (Research Euro Area - Rising stagflationary headwinds from Ukraine conflict, 28 February) and a global perspective in Monthly Executive Briefing - Ukraine crisis a new risk to global growth, 1 March. The recent spike in gas and oil prices will exacerbate the stagflationary risks to the global economy and the call for tighter monetary policies of the central banks amid growing risks of second-round effects.

Will Russia default? Putin signed decree on Saturday that will allow Russia and Russian companies to pay debt payments in rouble irrespective of denomination currency. It is still unclear whether a payment in another currency will imply a Russian sovereign default as some of the foreign sovereign bonds do allow payments in rouble. However, according to Bloomberg this option does not apply to coupons on USD bonds due March 16. Moody's cut Russia's credit rating to Ca yesterday - the second lowest Moody's rating. 

Devastating bombings of civilians. The pressure to step-up sanctions comes as more and more terrifying evidence appears showing that Russian deliberately are bombing civilians including schools and health care facilities. Yesterday, a safe passage for civilians from Mariupol was halted for a second day.

Russian anti-war protest: Western media report that anti-war protests were seen in 44 cities across Russia on Sunday. More than 4,300 protesters have been detained according to Reuters.  

Russian company boycott widens: Over the weekend Visa and MasterCard said that are suspending their operations in Russia. Netflix also suspended its service in Russia.

Equities: Massive risk-off in the European session on Friday. Stoxx 600 lost -4% - half an average yearly return in a single day. Banks a clear underperformer, contracting a massive -7%. Sentiment however improved across the Atlantic, with S&P closing down a meagre -0.8%. However, it was not a full turn-around in the US either, as defensives drove the intra-day rebound. Energy gained 3% and utilities and real estate were among the winners. Cyclical sectors all sold off (even materials!) with banks leading the declines, down -3%. Likewise, VIX edged back up to new highs at 32. Among other indexes, Dow closed down -0.5%, Nasdaq -1.7% and Russell 2000 -1.6%. US futures are down another 1-2% this morning, and Asian markets are contracting 2-3% on new sanctions from West.

FI: Friday's risk-off in global markets sent yields significantly lower across the board, leaving 10y Germany at -0.07%. Curves massively bull flattened with the 10s30s EUR swap dropping by more the 7bp to -11bp. The credit component in rates markets had a particularly tough day with 10y German ASW spreads widening more than 7bp, after almost touching 10bp wider on the day. The Schatz-ASW had a tougher day and ended 9bp wider at 72.8bp, after toughing 17bp wider in the afternoon. BTPs-Bund spreads widened 6bp, but also Finland and Austria due to its proximity/exposure to Russia widened vs. Germany.

FX: EUR/USD dropped sharply on Friday and the cross has continued lower overnight and is currently trading at 1.0865. Safe-havens such as CHF and JPY performed with EUR/CHF briefly trading below parity overnight. USD/JPY has been stable to slightly higher after the move lower on Friday. The higher oil price is supporting the NOK with EUR/NOK trading around 9.76 this morning.

Credit: This Friday spreads continued to widen due to the war in Ukraine and in particular due to the violent efforts by Russia to take over Ukraine's nuclear infrastructure. Itraxx main widened by 5.2bp and Xover by 26.4bp during Friday. These two indices now read 82.3and 399.5bp, respectively.

Nordic macro

Denmark: A broad political agreement was reached in Denmark Sunday that defence spending is to increase to 2% of GDP in 2033 from currently about 1.3%. As part of the agreement, the budget law will be eased so the government is allowed to aim for a structural deficit in any given year of 1% of GDP instead of currently 0.5%, and the upcoming 2030 fiscal plan will aim for a deficit in the final year of 0.5% of GDP. Hence, government debt should still decline as a share of GDP. For 2022 and 2023, defence spending will be increased and hence fiscal policy eased by DKK 3.5bn each year, 0.1% of GDP.

The additional spending of DKK 3.5bn each year in 2022 and 2023 is easily covered by the strong public finances and should not result in increased issuance. Looking at the net financing need for 2022, by end of February there was a surplus of DKK 75bn relative to an expected surplus of DKK 28bn based on the Budget Act from 2021. Hence, there should be plenty of room for covering the additional defence spending in both 2022 and 2023 without the need for additional bond issuance.

Importantly, it was also agreed that the Danish opt-out from the EU defence pact will be put to a referendum 1 June 2022. The broad agreement among the major Danish political parties to fully join the EU defence pact and step up military spending put extra focus on the Finnish and Swedish discussions on possible NATO membership.