Inflation? Stagflation?
I’m not sure about you, but I feel like I have aged 84 years in the past three weeks. It’s a good thing I am blonde, or my greys would be showing. The Russia-Ukraine war caused parabolic movement across a range of commodities, and the volatility in the marketplace is wearing everybody thin.
Commodities aren’t a great first-date topic, but they are certainly “in vogue” right now. While the invasion affected nearly all commodities, wheat was the poster child. In previous years, Ukraine and Russia accounted for nearly one-third of the world’s total wheat exports. Therefore, a sharp price move higher was expected. The “take no prisoners” move into new all-time highs, however, was not (fig. A).
Thanks to lightning-fast technology, there is very little that goes unnoticed in the trading community. Naturally, it wasn’t long before Joe Blow in his mom’s basement knew the trading symbol for wheat. In just nine trading days, wheat rallied over $4.40/bu. Say a pray for the poor souls that were caught short in the wheat market or trapped in the spreads; a lot of emotional and financial damage has undoubtedly occurred.
Another hot commodity is crude oil. NYMEX Light Crude Oil futures skyrocketed to the highest level since 2008 (fig. B). The EU relies on Russia for 40% of its gas consumption, which is used for heating homes and powering businesses. Unlike the US, which can replace absent Russian gas with supply from our closest neighbors, Mexico and Canada, Europe doesn’t have a Plan B.
So far, western leaders are treating the energy calamity with caution. While they have effectively vaporized the Russian economy with a barrage of sanctions, they deliberately spared Russian energy companies from worse penalties, such as kicking them out of the global messaging service SWIFT.
As you can see in the charts, crude oil and wheat are well off their highs. It will likely take another week to reveal whether the primary trends are reversing from up to down, or if the next move is non-trending. Either way, significant buying climaxes are set and the price action that typically follows is either consolidation or corrective rebounds.
Absent of full de-escalation of the war or dramatically increasing US oil production, trend reversals in the energy complex would be very concerning. It could indicate that the marketplace is sensing economic turmoil. After all, there are some mumblings that the energy debacle could lead to stagflation like it did in the 1970’s. Stagflation was a term coined in the 1960’s by UK politician Iain Macleod. It occurs when inflation soars, and economic growth slows. This is a buzz word you will likely hear in the coming months. It is reassuring for now that the US economy is not stagnating, and oil prices are not collapsing. While there is inflation, steps are being taking to reduce it.