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Post Market Wrap | Oil up 10 percent overnight as war on Ukraine intensifies

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This Post Market Wrap is presented by KOSEC – Kodari Securities

  • Inflationary impact of rising energy prices uncertain at present
  • Energy sanctions negative for global growth outlook
  • Sustained high energy prices may be inflationary, pushing global interest rates higher  
  • Higher energy and agricultural commodity prices positive for Australian economy
  • Current uncertainty pushing bond yields lower, for now.

Inflation and higher energy prices 

Energy markets have quickly responded to the worsening Ukraine crisis with Brent Crude up 10 percent to US$107.45 and West Texas Intermediate hitting US$106.30 today, up 11 percent from yesterday’s closing price. These prices compare to Brent Crude average spot prices of U$87 a barrel and WTI at US$83 in January this year.

 Equity markets continue to fall on the uncertainty of global GDP consensus growth estimates which were at 4.5 percent growth in 2022 and 4 percent in 2023. These estimates may be pared back in the months ahead as Central banks around the world assess the potential inflationary impact of rising energy prices on the global economy. Energy is a key input cost in the production of consumer goods. The inflationary impact is likely to be more severe, should the war on Ukraine persist for an extended period. Central Banks may be left with little choice other than to raise interest rates, should inflationary expectations be fuelled by sustained and materially higher energy prices. This outcome will ultimately be determined by the intensity and longevity of the war on Ukraine.  

This position creates a two-fold dilemma for Central Banks around the world. Firstly, Central Banks must anticipate inflationary pressures by pre-empting emerging inflationary signals by tightening money supply, before inflation becomes firmly entrenched in the global economy. This is achieved by increasing interest rates. However, pre-emptive strike action against inflation using higher interest rates, is certain to reduce the global economic growth outlook, at a time when global growth is recovering from the COVID pandemic. Overlay this with a potential decline in global trade, as sanctions against Russian exports are enforced, and world growth prospects are further diminished.

The impact of energy sanctions on global growth

This is where the imposition of sanctions on the Russian economy gets interesting. Russia is among the world’s largest producers of oil and natural gas. Around 50 percent of Russia’s total revenue is sourced from oil and gas sales into Western Europe. Cutting off energy supplies to these long-standing US allies would seriously impact several large European economies like Germany. It would also cripple the Russian economy, inflicting hardship on Russian citizens, potentially strengthening their resolve and rallying support for their leader, President Vladimir Putin. The world’s problems are then further compounded by the inflationary impact of higher energy prices. Higher interest rates in response to emerging inflationary pressures reduce economic growth.  

Energy sanctions may also destroy the Russian banking system, leading to defaults with counterparties around the world. Financial markets haven’t forgotten the negative impact of the Russian rouble crisis in 1998, which resulted in the Russian Central Bank defaulting on its debt. This default severely impacted the economies of many neighbouring European countries, This is the difficulty with energy sanctions which while punishing Putin, will have serious adverse economic consequences for US European allies. 

 Implications for Australia

The war on Ukraine, although morally abhorrent to all Australians, has few direct or immediate negative implications for the Australian economy. Australia is an export economy and prices for some of Australia’s major exports have increased because of the war on Ukraine. Prices for Australia’s energy and agricultural exports are materially higher on rising demand. Liquid natural gas, wheat, beef, wheat and wool prices are all materially higher in recent weeks. Australia is also a major gold producer. Gold is our sixth largest export commodity and is today trading at a 15-month high. 

Bond prices in the past week have risen as bond yields around the world fall. This is the market’s ‘flight to quality‘ response to the uncertainty created by the potential for the Ukraine crisis to manifest into an economic crisis. 

The outlook for Australian export commodities is positive, while the inflationary outlook, fuelled by higher energy prices, is unclear. The drop in bond yields may be temporary, if high energy prices are sustained for a prolonged period, resulting in higher global interest rates, to fight inflation.  

This Post Market Wrap is presented by Kodari Securities, written by Michael Kodari (CEO, KOSEC)

Michael Kodari is one of the world's most consistent, top performing investor. A philanthropist and one of the prominent experts of the financial markets, he has been referred to as ‘the brightest 21st century entrepreneur in wealth management' by CNBC Asia and featured on Forbes. Featured on TV as the "Money Expert", on the weekly Sunday program "Elevator Pitch", he is recognised internationally by governments as he was the guest of honour for the event "Inside China's Future", chosen by the Chinese government from the funds management industry, attended by industry leaders, when they arrived in Sydney Australia, on April 2014. Michael and George Soros were the only two financiers in the world invited and chosen by the Chinese government to provide advice, and their expertise on Chinese government asset allocation offshore. With a strong background in funds management and stockbroking, Michael has worked with some of the most successful investors and consulted to leading financial institutions. He was the youngest person ever to appear on the expert panel for Fox, Sky News Business Channel at the age of 25 where he demonstrated his skillset across a 3 year period forming the most consistent track record and getting all his predictions right over that period. Michael writes for key financial publications, is regularly interviewed by various media and conducts conferences around the world.

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U.S. retailers limit emergency contraception purchases

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Demand for morning after pills have led to retailers having to limit purchases

Amazon has limited sales of morning after pills as demand spikes following the U.S. Supreme Court ruling overturning Roe v. Wade.

There is now a limit of three Plan B units per week on emergency contraceptive pills sold through its website.

Other U.S. retailers are also capping purchases of emergency contraceptive pills like chain pharmacy, CVS and Walmart.

Plan B is an emergency contraceptive that can be taken within 72 hours after sex. It is a synthetic form of the hormone progestin which delays ovulation briefly and prevents pregnancy.

Demand has surged following last week’s U.S. Supreme Court ruling overturning Roe vs Wade, ending the constitutional right to have an abortion.

Since the reversal of Roe v Wade, women have tried to find ways to control their reproductive health, by stocking up on emergency contraception.

Social media is flooding with calls to stock up on Plan B in anticipation of possible restrictions on contraceptive pills.

Meanwhile, some US companies have committed to paying staff travel expenses for those wanting an abortion.

Katerina Kostakos contributed to this article.

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Chinese investment in Australia drops

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China’s investment in Australia has plunged to its lowest levels since 2007

A new report from KPMG and the University of Sydney shows Chinese companies invested U.S. $585 million in Australia last year, which is down from a peak of U.S $16.2 billion in 2008.

It comes as relations between the two nations remain sour. Australia has previously called for an independent review into the origins of Covid-19, and a ban on foreign interference.

But Chinese officials have responded with trade sanctions, which have affected Australian wine, seafood and coal exports.

Australia was once a large destination for Chinese investment. In fact, the two nations signed an historic Free Trade Agreement in 2015, with a key focus on economic growth and creating jobs.

Australia’s Prime Minister, Anthony Albanese says he will not make concessions to China. The newly-elected Albanese is in Europe for a series of talks with NATO leaders.

“The resistance of Ukraine has brought democratic nations closer together which have a shared commitment to rules-based, international order,” he says.

But Chinese officials believe it is irresponsible to place Ukraine and Taiwan in the same basket.

Chinese Foreign Ministry spokesman Zhao Lijian says “Taiwan is by no means Ukraine,” and labelled Albanese’s comments as “irresponsible”.

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Target offers support to employees seeking abortions

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Target will help its employees living in states where abortions are banned by funding their travel

The company sent a memo to employees via email with the new policy to be enacted in July.

Target’s Chief Human Resources Officer says “A few months ago, we started re-evaluating our benefits with the goal of understanding what it would look like if we broadened the travel reimbursement to any care that’s needed and covered – but not available in the team member’s community”.

She says “This effort became even more relevant as [Target] learned about the Supreme Court’s ruling on abortion, given that it would impact access to healthcare in some states”.

This all comes amid the reversal of Roe versus Wade removing abortion as a constitutional right within the U.S.

This has sparked a range of companies to provide similar benefits with Amazon also providing travel coverage for employees.

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