Ukraine Crisis: What It Means For Markets

2022-02-25

By Sam Shames

The Russian Invasion of Ukraine affects crude oil and many other commodities. This means many things to many people, but what does it mean for markets?

While we don’t ever want to focus on news over price, price remains the key indicator for traders. We also want to be aware of the potential ramifications the actions in Europe may have on global markets. 

First, the classic idiom “buy the rumor, sell the news” ... or in this case “sell the rumor, buy the war” is a saying we have heard before. And it very well may apply in the Ukraine crisis, at least for now. We have seen the markets fall a good bit in the month of February leading up to the Russian incursion into Ukraine. Yesterday we saw a major short squeeze rally on the “official” start of the attack. This is all confusing action unless we remember the rumor/news dynamic of markets. In the very near term, shorts may be trapped for a bit... But what does this mean for markets longer term?

 

Market Volatility

Let’s start with Ukraine, why does this crisis matter? The simple answer, as it relates to markets, is resources. Ukraine is one of the richest countries on Earth when it comes to having a vast amount of varied natural resources. Ukraine is one of the biggest producers of wheat, iron, uranium, titanium, neon, and many more commodities used in everything from semiconductors to food supplies. 

Because Ukraine is so resource rich, an extended occupation there may result in market volatility from price jumps for all these various commodities where Ukraine is a large exporter of these resources. The uncertainty around a prolonged occupation will create further upward pressure on these various commodities. We have already seen this effect in wheat and metals. 

How Russian Invasion of Ukraine Affects Crude Oil

Natural Gas and Oil

Ukraine is a key pass-through for many Russian gas pipelines into Eastern Europe. These pipelines are essential in getting Russian natural gas to countries like Germany. The same logic applies here in that any uncertainty around these pipelines will create upward pressure on both natural gas and oil prices. 

This reveals how Ukraine is a key pivot point of power for both Russia on one side and Eastern Europe on the other. Whoever controls Ukraine gains access to the vast mineral wealth under its soil as well as a key strategic pass-through for the energy that feeds most of Europe. But there is more to it than that and the next potential effect can be found here in the United States.

Interest Rate Hike?

The uncertainty around the Russian invasion may also cause the Federal Reserve to slow down the pace of its anticipated rate hikes planned for March. The Fed is likely to still raise rates at the March meeting and even subsequent meetings after that, however, with the specter of conflict and potential war in a key part of the world, the Fed may also look to signal that it doesn’t need to raise rates as quickly as expected. 

Global conflict and potential war have a way of slowing economic growth, which also historically slows inflation. Because of this dynamic we could see the Fed do the bare minimum at the next March meeting and only raise 25 basis points, when the market originally feared 50 or higher. 

The Fed may also use this conflict as a reason to moderate future rate hike expectations by saying they are “looking at the data” before deciding. So, in a way, global conflict brings all kinds of instability to the markets. If the Fed decides to slow the expectations of rate hikes this year, that may put a buffer under markets. The original boogeyman was not Russia/Ukraine, But rather market expectations for a very fast rate hike cycle. The Fed would in effect slam the brakes on rate hikes... which the market would not like.

We don’t want to take the rate hike dynamic as a sure thing as the Fed is certainly behind the 8-ball on inflation. Officials will need to do something to combat this dynamic soon. A longer than expected invasion by Russia of Ukraine does introduce many reasons for the Fed to slow the rate hikes and for markets to stabilize even in the face of global conflict. 

How to Trade Commodities During the Russian Invasion of Ukraine

As a trader, remember that it is not your job to be an expert on geopolitical conflicts nor is it your job to stare at news screens all day. All information that is known gets reflected in market prices as those with greater levels of information take actions in the market. Some of the trades I like based on the charts, and then buoyed by the dynamics in Europe, are going long on the stocks and commodities mentioned below.

Gold

As we all know gold is a precious metal that technology is dependent upon. Constant advances in technology have created shortages of semiconductors and the pandemic increased demand. Gold has the potential to be more valuable as the crisis in Ukraine is prolonged.  

Natural Gas

Natural gas in the past was one of the cheapest ways to consume energy and be environmentally friendly. Natural gas powers homes and businesses throughout the world. However, with the vast quantities of natural gas being supplied by Russia (in Europe and the United States), the supply versus demand has a greater chance of increasing. And, being on the right side as a stakeholder of that increased demand can be a smart move for your portfolio. 

Crude Oil 

The Russian invasion of Ukraine also has an affect on crude oil. With Russia supplying the majority of Europe with gas and oil, the price of crude oil is going to get a lot more volatile. Production is going to get a lot more competitive, and any time there is major competition with a finite commodity, price is usually the first to be affected.      

Food and fertilizer stocks and commodities

Even in the best of times, going long on food and fertilizer stocks is a smart move. Anything that has to do with the continuation of life will always be in demand. But, when war has been introduced to the world, food and farming supplies will be that much more important. 

Market Sectors to Sell

We've covered how the Russian invasion of Ukraine affects crude oil and gold, but how does it affect financials? Banks and financial institutions are market sectors expected to be hit pretty hard in the foreseeable future because of market uncertainty, the Fed increasing interest rates, and the global issues that are causing market hysteria. But, in all of the uncertainty, remember to follow the charts, especially now in such an externally noisy environment. Also maintain an understanding of why this situation matters for key markets such as interest rates, commodities, and risk appetite in general.

Here at Simpler Trading we can help you become a better trader. There are many factors that can derail even the most experienced trader, especially in uncertain times like these. Our traders are not only experts in their field, but professionals who can deal with the variables in the market. So, join our options trading room, and never trade alone, only at simplertrading.com.