“Russian Commodities Are Today Like Subprime CDOs Were In 2008,” Rates Strategist Says

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The 50th anniversary of the 1973 shock caused by the Organization of the Petroleum Exporting Countries oil embargo echoes “something similar but significantly worse – Russia’s 2022 supply shock”, according to a widely followed rates strategist.

The far-reaching commodity shock caused by soaring energy, grain and metal prices following Russia’s invasion of Ukraine threatens to upend the financial system that has been in place since the end of from the Bretton Woods setting in the early 1970s, with China’s central bank poised to play a key role in a shift that could cement a much bigger role for the yuan, said Zoltan Pozsar, global head of rates strategy at term from Credit Suisse, in a note dated March 7.

West Texas Intermediate crude for delivery in April CL.1,
+1.37%,
the U.S. benchmark rose $4.30, or 3.6%, to close at $123.70 a barrel on Tuesday after President Joe Biden announced a U.S. ban on oil and other energy imports Russians. May Brent BRNK22,
+1.16%,
the global benchmark, jumped 3.9% to end at $127.98 a barrel on ICE Futures Europe.

WTI is up 34% and Brent is up more than 36% since Feb. 23, the day before Russian President Vladimir Putin launched his invasion of Ukraine. Some Russian crudes have struggled to find buyers even as Western powers have sought to exempt the country’s energy flows.

Read: Why Russian Oil Can’t Find Buyers Even as Crude Surpasses $100 a Barrel

W00 wheat futures,
-1.04%
rose to historic highs as nickel futures doubled on Tuesday before the London Metal Exchange stepped in to call off trades. Stocks fell, with the Dow Jones Industrial Average DJIA,
-0.56%
entering correction territory on Monday and the tech-heavy Nasdaq Composite COMP,
-0.28%
slide into a bear market. The S&P 500 SPX,
-0.72%
is down 1.3% from its pre-invasion level.

To see: Russian-Ukrainian war fuels ‘biggest supply shock in world grain markets’ in living memory

“There are Russian commodities collapsing in price and there are non-Russian commodities rallying…due to ‘current and future sanctions-related stigma’ which has created a ‘buyers’ strike’ “rather than a ‘salesmen’s strike’,” says Pozsar.

“Russian commodities today are like subprime [collateralized debt obligations] were in 2008. Conversely, non-Russian commodities are like US Treasury securities in 2008,” he wrote. “One is collapsing in price and the other is rising, with margin calls on both, regardless of which side you are on.”

Read also : Ukraine invasion stokes fears of stagflation because Russia is a ‘commodity supermarket’

If so, who would be able to provide a safety net? Pozsar said the only candidate was the People’s Bank of China.

Western central banks cannot step in to shut down the “commodity base” because their respective governments are behind the sanctions, he argued, while the PBOC has two options:

It could sell treasury bills to finance the leasing and filling of ships to clean up Russian “subprime” commodities, which would weigh on treasury prices and stabilize the commodity base, giving the PBOC control of inflation in China, while the West suffers from commodity shortages, a recession and higher yields, which go in the opposite direction of Treasury prices.

The PBOC’s second option is to do its own version of quantitative easing: printing renminbi to buy Russian commodities.

“If so, this is the birth of the eurorenminbi market and China’s first real step to break the hegemony of the eurodollar market,” he said. “It’s also inflationary for the West and means less demand for long-term Treasuries.”

That’s why, according to Pozsar, the crisis “is unlike anything we’ve seen since President Nixon stripped the U.S. dollar from gold in 1971 — the end of the era of currency-based currencies.” raw materials. When the current crisis is over, Pozsar said he expects the US dollar to be much weaker and the renminbi much stronger, supported by a basket of commodities.

“After this war ends, “money” will never be the same… and Bitcoin BTCUSD,
+1.16%
(if it still exists then) will likely benefit from all of this,” Pozsar wrote.

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