Oil price surges as Ukraine conflict continues

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MARKETS

Local and global equity markets were mixed this week with investor sentiment stuck between valuation support (positive), inflation (negative), and the ongoing conflict in Ukraine (negative).

In local stock news, Australian insurers declared an insurance catastrophe as the number of claims for flood assistance on the east coast soared, with Suncorp already flagging $75 million of additional costs.

Oil prices surged due to the ongoing Russia/Ukraine conflict whilst reports US crude stockpiles fell more than expected didn’t help, putting more pressure on countries to release oil from their emergency stockpiles.

Both the Aussie dollar and the US dollar rose this week as currency investors sought out safety away from Europe whilst the US central bank chair also suggested a first rate hike was imminent.

ECONOMIC

The Reserve Bank of Australia left the cash rate unchanged as expected at their March meeting with their statement emphasising patience before their first rate hike and a focus on prevailing inflation data over the next two quarters along with labour market conditions, particularly wages. Australian economic growth bounced by 3.4% in the 4th quarter to be up by 4.2% on a year ago levels, with household consumption surging and inventories adding to growth. Dwelling investment, business investment, public demand, and net exports were all modest drags on growth. The household savings rate fell, but the level of savings remains significantly higher than pre-pandemic levels. A range of business indicators showed support for Australia’s economic growth outlook with inventories up in Q4, company profits rose 2.7% after adjusting for inventories, wages and salaries up 1.9%, retail trade up 1.8% in January, and private sector credit growth up 0.6% in January. Australian dwelling prices rose by 0.3% across the 8 capital cities in February with annual growth now sitting at 19.2%. Prices were mixed across the country, with Sydney and Melbourne flat whilst gains were recorded in Brisbane, Adelaide, and Perth. New lending for Australian housing rose by 2.6% in January, driven by a strong increase in lending to investors which was up a very strong 6.1%. Lending to first home buyers continued to fall. Personal lending also rose by a small 0.2% after falling by 3.6% in December. The Australian trade surplus widened in January driven by a sharp lift in exports, which rose 7.6%. Iron ore and coal exports provided the boost up by 15% and 16.7% respectively. Rural goods exports also remained strong. Goods imports fell by 2.5%, but still sit materially higher over the year. Australian building approvals fell sharply in January with a 27.9% record drop, coming in well below the modest fall expected by the market. It was a weak set of numbers across the board. US central bank officials appear to be sticking to their resolve to raise interest rates at this month’s meeting despite the uncertainty posed by the Russia/Ukraine conflict. Tough situation as speculation has continued to increase regarding a delay to their first rate rise. Fed chairman Powell, appearing before a government committee, said he would propose a 0.25% increase at their next meeting. French inflation accelerated more than expected, whilst the prices of basic goods in the UK are rising at the fastest pace in more than a decade, adding further pressure on the European central bank who would prefer to withdraw stimulus at a very slow and measured pace. The Chinese central bank moved to further support liquidity by injecting US$45.8 million into the financial system, the most since September 2020. China’s Politburo, of less relevance post Xi’s ascension to almost dictatorship, has vowed to strengthen macroeconomic policies to stabilise the economy this year, suggesting more support could be offered. China’s official manufacturing and non-manufacturing data for February outperformed expectations, alleviating fears of a China slowdown.

POLITICAL

Western nations proceeded with sanctions against Russia to limit their ability to do business by freezing bank assets and cutting off state owned enterprises, whilst also agreeing to disconnect some Russian banks from the SWIFT international banking system and limiting the ability of Russia’s central bank to support their currency. Putin responded by ordering Russia’s nuclear-deterrence forces to be put on alert. Interestingly, Russia’s oil and gas reserves have yet to be targeted and there’s still significant exemptions to many of the sanction lists. Also interesting has been Russia’s invasion/occupation strategy. Russia has barred airlines from 36 countries from its airspace and banned its residents from transferring currency abroad, whilst Turkey has closed the Dardanelles and Bosphorus to warships, only allowing ships to return to their bases. US President Biden has approved the release of an additional US$350 million worth of weapons from US stocks to Ukraine, which is their 3rd release in 6 months, amounting to more than US$1 billion in security assistance. Other nations have followed suit. US President Biden pledged action on inflation in his State of the Union speech but didn’t offer any realistic ways of reducing inflation which recently hit a 40-year high. He told businesses not to cut wages but to cut other costs….

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