Russian stocks and currency are retreating amid geopolitical uncertainty
The Russian stock market has dropped more than 4% on Monday, following two weeks of steady decline, while the national currency fell to its weakest in more than a year 78 rubles against the US dollar.
The plunge comes amid mounting geopolitical tensions stemming from claims that Russia is planning to attack Ukraine, actively spread by EU and US officials and fueled by major Western media outlets.
“We expect Russian equities to extend losses today due to an escalation in geopolitical tensions over the weekend,” analysts at Alfa Bank said, as quoted by AFP.
Renaissance Capital reportedly said in a note to clients that the ruble could fall by up to 20% to the dollar in the event of a military escalation.
The Central Bank of Russia announced on Monday that it plans to suspend foreign exchange purchases under fiscal rules to reduce pressure on the ruble. The regulator also said it has all the necessary tools to reduce threats of financial instability.
Western officials were expected to meet on Monday to try and coordinate retaliation measures and discuss new anti-Russian sanctions that should be imminently introduced if Moscow launches a military assault on Ukraine.
Media reports claim Russia has amassed over 100,000 troops on the border with Ukraine, with some Western officials believing that a military incursion is around the corner.
Britain and the US have ordered some staff to return home from their embassies in Ukraine with their families.
Russian authorities have repeatedly rejected accusations that Moscow is planning an invasion of Ukraine, which have been voiced by Washington and its allies since November last year, describing the claims as groundless attempts to instill “hysteria.”
Former president’s Digital World Acquisition sparked a retail trading frenzy
Shares in Digital World Acquisition Corporation (DWAC), the company connected to a planned social media app backed by former US president Donald Trump, have rallied to outperform every other special-purpose acquisition company (SPAC). Digital World currently ranks as the best-performing SPAC stock ever, according to SPAC Research.
The outstanding performance comes despite the regulatory risks facing the merger. The shares ended trading at $73.12 on Friday, way above their $10 initial public offering price. That infers a valuation on the combined entity of close to $13 billion, including debt.
Moreover, DWAC’s share performance has boosted the average trading price of all 114 SPACs that have announced deals that are yet to close. According to SPAC Research, the average SPAC (excluding DWAC) is currently trading at $9.88 a share, below the average trust value of about $10.05.
In October, Trump announced plans to launch a new media company that will “stand up to the tyranny of Big Tech.” Trump Media & Technology Group (TMTG) simultaneously inked an $875-million deal to merge with a SPAC company called Digital World Acquisition Corp.
SPAC deals, also known as reverse mergers, have become very popular in recent years, with celebrities, former politicians and athletes getting involved. SPACs raise money from the public and promise to use those funds to acquire private firms. It’s an increasingly popular way for private companies to go public.
However, SPACs regularly come under regulatory scrutiny. Digital World disclosed in December that federal regulators have opened investigations into the planned merger for potential violations of securities laws around disclosure.
App Store currently lists February 21 as the date that Trump’s new social media app, Truth Social, will be available to download.
Oil market realizing many OPEC producers may not have the capacity to boost output much further
As the OPEC+ group unwinds its production cuts, the oil market has realized that not only do many producers in the pact lack the capacity to boost output further, but those who can pump more are reducing the global spare production capacity, thus exposing market balances to unexpected supply disruptions, and oil prices to further spikes. Most of the world’s global spare capacity is currently held by OPEC’s Middle Eastern members Saudi Arabia and the United Arab Emirates (UAE). Those two producers have the potential to raise their output as OPEC+ continues to unwind the cuts, but they are doing so at the expense of declining spare capacity.
Low spare production capacity could set the stage for a prolonged oil price rally because the world would have a lower buffer to offset sudden supply disruptions, which are always lurking in the global oil market.
The unrest in Kazakhstan and the blockade in Libya in the past month highlighted the challenge that the oil market will be facing if spare capacity continues to shrink. And shrink it will—that is, if OPEC+ continues to add 400,000 barrels per day (bpd) to its production quota every month until it unwinds all the cuts.
Higher OPEC+ Production Means Lower Spare Capacity
The problem with OPEC+ is that only a handful of producers can keep some capacity in reserve while raising production. The few who can include OPEC’s top producer and the world’s largest oil exporter, Saudi Arabia, the UAE, and to some extent, Kuwait and possibly Iraq. Iran, under US sanctions, has over 1 million bpd that could return to the market. But Iran will be able to tap that capacity only if the ongoing nuclear talks are successful—a development that many analysts doubt will occur anytime soon.
With Iran currently out of the equation, it’s mostly up to the Arab Gulf states to produce more oil and at the same time have some spare capacity left. The other issue is that the nameplate spare capacity may not be equal to the producers’ ability to pump oil—the limit of spare capacity has never been tested, even in Saudi Arabia.
Sure, the United States, Canada, and Brazil—all of which are outside OPEC+ pacts—are expected to raise their oil production this year as high prices and growing demand incentivize more activity and drilling. In the US shale patch, however, capital discipline continues to be a key theme, so annual production increases are not expected to be anywhere near the 2018-2019 surge in output.
With demand expected to exceed pre-Covid levels this year, the low spare capacity and the low upstream investment in recent years are setting the stage for even higher oil prices.
OPEC+ will see its spare capacity reduced to just 2.3 million bpd by July 2022, at the height of the driving season, according to Bloomberg estimates. This would be the lowest spare capacity since the end of 2018. Most of it will be held by the Arab Gulf producers—the only ones thought to be able to pump to their OPEC+ quotas throughout this year.
Even Russia is struggling. Russia has seen setbacks recently in its attempt to pump to its quota, and will likely continue to lag in the coming months, analysts tell Bloomberg. Russia may be able to raise its output by 60,000 bpd each month in the first half of 2022—just over half of the monthly production growth of 100,000 bpd it is entitled to, according to analysts polled by Bloomberg.
Triple-Digit Oil
Russian supply will level off in the next two months, Francisco Blanch, head of global commodities at Bank of America, told Bloomberg last week, saying that triple-digit oil “is in the works” for the second quarter this year.
Demand is recovering meaningfully, while OPEC+ supply will start leveling off within the next two months, Blanch said, noting that it will be only Saudi Arabia and the UAE that can produce incremental barrels to add to the market.
Moreover, OPEC+ has been undershooting its collective production targets for months and will likely continue to do so in the months ahead.
Even OPEC officials admit that the OPEC+ group will struggle to increase supply as much as the nameplate monthly increase allows, and prices could spike to $100 a barrel, some officials from OPEC producers have recently told Reuters.
Apart from Bank of America, other major Wall Street banks also predict that declining spare capacity and the inability of OPEC+ producers—except for just a few—to boost production will lead to triple-digit oil prices.
Oil prices could hit $100 this year and rise to $105 per barrel in 2023 on the back of a “surprisingly large deficit” due to the milder and potentially briefer impact of Omicron on oil demand, Goldman Sachs said last week. Due to gas-to-oil substitution, supply disappointments, and stronger-than-expected demand in Q4 2021, OECD inventories are set to dip by the summer to their lowest levels since 2000, Goldman’s analysts note. Moreover, OPEC+ spare capacity is also set to decline to historically low levels of around 1.2 million bpd.
“At $85/bbl, the market would remain at such critical levels, insufficient buffers relative to demand and supply volatilities, through 2023,” Goldman Sachs said in a note.
JP Morgan, for its part, expects the falling spare capacity at OPEC+ to increase the risk premium in prices, and sees oil hitting $125 a barrel this year and $150 a barrel next year.
“We see growing market recognition of global underinvestment in supply,” the bank said in a note carried by Reuters.
The world’s number one cryptocurrency, Bitcoin, has declined to nearly $33,000 on Monday, marking a daily drop of nearly 5%, according to data tracked by CoinDesk. The second most popular crypto, Ethereum, plunged 9.3% to $2,209 in a 24-hour span.
Earlier in the day, both tokens fell to their lowest since July, each dropping more than 50% from their all-time highs.
The major sell-off wiped nearly $130 billion off the value of the entire cryptocurrency market, and spread across the stocks, which extended losses recorded earlier this year, posting the worst week since March 2020.
Riskier assets like technology stocks and digital currencies have seen a heavy sell-off due to increased geopolitical risks related to the conflict between Russia and Ukraine, as well as the latest push by the US Federal Reserve for tightening monetary policy at a faster pace than expected.
Moreover, investors are assessing the impact of further regulatory steps towards the cryptocurrency market across the world. Last week, the Central Bank of Russia’s proposed ban on the use and mining of digital currencies. Last year, the Chinese authorities prohibited cryptocurrency mining in the Sichuan Valley, triggering an adverse impact on the market.
“Bitcoin and crypto have been reacting much more violently, given the nature of the asset class, and we’re likely to test $30,000-$32,000 given current sentiment and momentum,” Vijay Ayyar, vice president of corporate development and international expansion, told CNBC.
US electric car manufacturer countersues banking giant over disputed bond contract
Tesla submitted a filing in Manhattan federal court on Monday, accusing JPMorgan of “bad faith and avarice” for demanding $162.2 million after the bank had unilaterally changed the terms of warrants it received when the electric carmaker sold convertible bonds back in 2014.
Warrants allow holders to purchase company stock at a set “strike” price and date.
“JPMorgan pressed its exorbitant demand as an act of retaliation against Tesla both for it having passed over JPMorgan in major business deals and out of senior JPMorgan executives’ animus toward Mr. Musk,” Tesla said, adding that by changing the terms the banking multinational “dealt itself a pure windfall” after receiving a “multibillion-dollar payout” from Tesla’s soaring share price.
Tesla’s countersuit escalates the conflict between the US’ biggest investment bank and the world’s most valuable automaker, which have hardly done any business with each other since the disputed contract.
The legal battle began last November, when JPMorgan took Tesla to court for “flagrantly” violating a stock warrants contract. The bank alleged that the car manufacturer sold warrants to JPMorgan in 2014, which were to be paid off if their strike price, or guaranteed fixed price, was below Tesla’s share price upon the warrants’ expiration in June and July 2021.
JPMorgan claimed that the tweet shared by Tesla’s eccentric CEO Elon Musk on August 7, 2018 made the automaker’s share price more volatile. Musk tweeted that he might take Tesla private and had “funding secured,” but backtracked his comments 17 days later. Tesla’s share price had risen nearly ten-fold by the warrants’ expiration date.
Musk’s tweets led to a civil lawsuit by the US Securities and Exchange Commission. The litigation resulted in Musk giving up Tesla’s chairmanship, and he and the company each being fined $20 million.
