Oil prices have soared more than 10 per cent in hectic trading as the risk of a US and European ban on Russian product and delays in Iranian talks triggered what was shaping up as a major stagflationary shock for world markets.
The euro extended its slide, hitting parity against the safe haven Swiss franc, and commodities of all stripes were on the rise as the Russian-Ukraine conflict showed no sign of cooling.
Russia calls the campaign it launched on February 24 a “special military operation”, saying it has no plans to occupy Ukraine.
Brent was quoted $12.73 higher at $130.84, while US crude rose $9.92 to $125.60.
That will act as a tax on consumers and the potential blow to global economic growth saw S&P 500 stock futures drop 1.4 per cent, while Nasdaq futures shed 1.9 per cent. US 10-year bond yields also dropped to their lowest since early January.
Japan’s Nikkei sank 1.9 per cent, while MSCI’s broadest index of Asia-Pacific shares outside Japan lost 0.3 per cent.
Having climbed 21 per cent last week, Brent crude was further energised by the risk of a ban of Russian oil by the United States and Europe.
“If the West cuts off most of Russia’s energy exports it would be a major shock to global markets,” said BofA chief economist Ethan Harris.
He estimates the loss of Russia’s 5 million barrels could see oil prices double to $200 a barrel and lower economic growth globally.
And it is not just oil, with commodity prices having their strongest start to any year since 1915, says BofA. Among the many movers last week, nickel rose 19 per cent, aluminium 15 per cent, zinc 12 per cent, and copper 8 per cent, while wheat futures surged 60 per cent and corn 15 per cent.
That will only add to the global inflationary pulse with US consumer price data this week expected to show annual growth at a stratospheric 7.9 per cent, and the core measure at 6.4 per cent.
All of which complicates the policy picture for the European Central Bank when it meets this week.
“Given the potential for stagflation is very real, the ECB is likely to maintain maximum flexibility with its asset purchase program at 20 billion euros through Q2 and potentially beyond, thus effectively pushing out the timing of rate hikes,” said Tapas Strickland, an economist at NAB.
“Higher CPI forecasts, though, mean rate hikes will be needed on the horizon.”
The near-term prospect of a more dovish ECB combined with safe-haven flows to drive German 10-year bond yields down a huge 32 basis points last week. US 10-year yields were down at 1.69 per cent, having already dropped 23 basis points last week. .
Fed fund futures were also gaining as the market priced in a slower pace of rate rises from the Federal Reserve this year, though a March hike is still seen as a done deal.
With the outlook for European growth darkening, the single currency took a beating and fell 3 per cent last week to its lowest since mid-2020. It was last down 0.6 per cent at $1.0864 and in danger of testing its 2020 trough around $1.0635.
The euro was also tumbling against the Swiss franc to hit 1.0000 for the first time since early 2015.
The dollar was broadly firmer, supported in part by a strong payrolls report which only reaffirmed market expectations for a Fed hike this month. The dollar index was last at 98.877 having climbed 2.3 per cent last week.
“Events in the Ukraine are increasingly overwhelming the euro,” said Richard Franulovich, head of FX strategy a Westpac.
“With safe-haven flows likely to continue for sometime yet and Fed officials eager to press on with their policy normalisation plans, 100+ for (the dollar index) is just a matter of time.”
Gold benefited from its status as one of the oldest of safe harbours and was last up 1.0 per cent at $1,988 an ounce.