The war in Ukraine had investors feeling nervous this morning as stocks continued their decline. In particular, the market seemed concerned about how economic sanctions against Russia would impact the US. The Dow, S&P, and Nasdaq Composite all plunged through noon. Surging energy prices (oil specifically) threatened to simultaneously spike inflation while slowing growth.
Leuthold Group chief investment strategist Jim Paulsen described the situation succinctly in an interview this morning.
“’Stagflation’ is rapidly becoming the central focus in portfolio strategies,” Paulsen said.
“Preparing for slower growth and more persistent inflation is driving investor fears and actions.”
WTI Crude oil temporarily hit a whopping $130 per barrel over the weekend, a price level unseen since 2008. WTI Crude was down to $117 as of this morning but remained elevated from last week. Brent crude – the international benchmark for oil – went as high as $139.13 per barrel before retracing back to $121.
“The equity market is wrestling with the large commodity supply shock, including notably oil prices, and concerned that this could be morphing into a ‘stagflationary’ shock instead of just an inflation shock,” said Oxford Economics’ Kathy Bostjancic.
“Equities will be keying off changes in oil prices and the prospects of an oil embargo from Russia.”
Certain oil stocks – those in the exploration and production industry – have risen alongside oil. Others, primarily “gas station stocks,” were whacked by rising oil prices, as gas became prohibitively expensive in many parts of the world.
In Germany, for example, large metal gasoline cans were sold out almost everywhere. Germans began to stockpile gas over the weekend out of fear.
Obviously, this is not the kind of thing that happens in a healthy market. But it’s not just oil that’s erupting higher. Wheat had risen over 48% in 2 weeks as of last Friday, and now, it’s threatening to go higher still.
According to Reuters, the Chinese agriculture minister said on Saturday that the country’s winter wheat crop had the potential to be the “worst in history.” Heavy rainfall last year caused planting delays in roughly one-third of China’s typical wheat acreage.
“Not long ago we went to the grassroots to do a survey and many farming experts and technicians told us that crop conditions this year could be the worst in history,” Minister of Agriculture and Rural Affairs Tang Renjian said.
“This year’s grain production indeed faces huge difficulties.”
The war in Ukraine initially spiked wheat futures higher because Russia and Ukraine supply roughly 29% of the world’s wheat. If China (which produces more wheat than Russia and Ukraine combined) sees a weak harvest, wheat futures could have much further to run.
Tang said the summer harvest is on track to yield more wheat than usual, though, alleviating some concerns.
Still, futures traders seem to think that a wheat shortage – yes, a wheat shortage – is coming. The reason being that, in addition to China’s problems, Ukrainian farmers have missed their key window in which to plant wheat for the coming harvest season due to the war.
“If farmers in Ukraine don’t start planting any time soon there will be a huge crisis to food security. If Ukraine’s food production falls in the coming season the wheat price could double or triple,” said Kees Huizinga, a Dutch farmer who operates a farm in central Ukraine.
And we’re not even mentioning the potential fertilizer shortage that could arise should Russian fertilizer manufacturers heed Putin’s “recommendation” to halt exports. Along with oil and wheat, fertilizer is another commodity in which Russia is a top producer.
It almost seems like Russia’s inviting sanctions against itself in order to gouge the West via higher commodity prices. Intentional or not, commodities are surging, only making America’s fight with inflation more difficult.
With a rate hike coming up later this month, investors will find out how serious the Fed is about smashing down inflation, leaving stocks open to another “flash crash” reaction, all while the White House mulls over a potentially disastrous Russian oil embargo.
