nickel up 91%, palladium up 32% since invasion

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Highly volatile commodity markets appear to be the main issue for traders this week, with no end in sight for war in Ukraine and possible new sanctions against Russia. While we predicted at the end of last year that 2022 would be defined by commodity gains – we were buying stocks in the oil and mining sector, and already owned Glencore (up 62% since our takeover) – we didn’t expect commodity prices to move to be quite as violent as this.

Oil, natural gas and wheat prices fell dramatically yesterday after soaring on several daily runs since the invasion began, while stocks rallied as bargain hunters rushed to buy shares and that investors were considering the potential of talks in Ankara aimed at trying to find a solution to the escalating conflict.

The FTSE 100 opened lower after jumping 3.2% yesterday after bargain hunters came out strong and oil prices fell significantly. This has helped the index recoup its losses since the invasion, down just around 1% in the fortnight. The DAX in Frankfurt has been on a biting roller coaster, plunging dramatically since the invasion, before jumping almost 8% in trading yesterday in a relief rally.

New scenes of devastation are still unfolding and refugees continue to flow across borders, so trading on exchanges is expected to remain volatile until a lasting solution is found and investors assess the situation. impact of conflict on soaring inflation and faltering growth potential.

OPEC News Put Oil on the Rise

Some sort of calm has settled, however, after OPEC+ member the United Arab Emirates said it was willing to encourage other members to pump more oil to relieve sky-high prices and bring in more energy. stability to the global economy. This triggered the biggest drop in Brent crude since April 2020, with the benchmark dropping 13% during the session. A barrel is currently trading around $117, which is still almost 18% higher than when the invasion began, a breathtaking increase for businesses and consumers already struggling with higher fuel costs.

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Although wheat prices have cooled off a bit since their scorching peak earlier in the week, Chicago-traded futures are still trading around $11 a bushel, still around 14 and up nearly 15 % since the start of the invasion. Russia and Ukraine account for 29% of wheat exports and with the measures put in place by Kyiv to limit grain exports given the crisis in the country, supplies to the region have decreased significantly.

Commodity prices rise since the start of the invasion of Ukraine

  • Brent +18%
  • Wheat +15%
  • Nickel +91%
  • Palladium +32%
  • Gold +4%
  • FTSE 100 -1%

The suspension of operations in Russia by major commodity traders is expected to keep the pressure on. “Ukraine is described as the breadbasket of Europe and therefore the limit on the amount of grain leaving the country is set to make a cart full of goods more expensive, the price of baked goods, beer and pasta in particular needing to increase,” explained Susannah Streeter, Principal Investment Analyst at Hargreaves Lansdown. “Some growers may have hedged against this dramatic price rise for now, but volatility is likely to persist.”

Focus on nickel and palladium

Nickel prices have also been on serious nerves, with Russia a key global exporter of the metal which is in high demand as the electric vehicle revolution gathers pace. The metal has soared 91% in the past fortnight with a series of highly volatile trades leading to a suspension of trading on the London Metal Exchange, which is not expected to resume until Friday.

Concerns are growing over the safety of palladium exports, with metal prices soaring nearly 32% since the invasion.

“Given its status as a critical material for manufacturing computer chips, with Russia being the world’s largest exporter, it is no surprise that its price has skyrocketed given the high demand but dwindling supply of metal,” Streeter said. “Gold has fallen again from its recent high, but overall it has returned to the forefront as a traditional safe haven, rising 4% since the start of the invasion of Ukraine, investors looking to diversify across a range of different asset classes.”

Although Germany and other eurozone countries have so far halted sanctions on Russian energy exports, supplies have already been disrupted as shipping companies avoid ports in the region and businesses start reduce their exposure to Russia. European natural gas has fallen, but is still up 9% since Feb. 24, as traders continue to worry about the risks of taps to Europe being turned off in a desperate retaliatory move by Russia.

A difficult challenge for the Bank of England

As consumers and businesses grapple with an inflationary shock, many economies around the world are going through a tough time, particularly in the UK. In exactly one week, Bank of England policymakers will decide on rate hikes and they face a largely unsolvable conundrum. The commodity chaos is set to lead to even higher-than-expected inflation in the coming months, with speculation that the CPI will climb to 8% before falling back and climbing again in the fall as US bills rise. energy will increase.

But the double whammy is that these super high prices affecting oil, metals and grains may be difficult for businesses and consumers to bear, driving down spending and investment and could reverse the recovery. Already household confidence has hit its lowest level in a decade according to the latest YouGov investigation, and an interest rate hike will add to further financial difficulties at a time when tax hikes will also hit soon.

The main task of the Bank of England is to keep prices stable and monitor financial stability amid the risks of runaway inflation which undermines this and overall economic health. Thus, the return of inflation to the 2% target remains its priority and it is very likely that a rate hike is expected next week. But given the highly volatile situation, policymakers should limit the increase to 0.25%, to try to dampen demand but not to squeeze life out of the economy.

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