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Editor's Note: Below is a note written by Hedgeye editor Eric Wallerstein and junior Macro analyst Ryan Ricci. For more insights like this, sign up for our free Weekend Reading newsletter. |
When one of the world's largest commodity exporters invades another exporter, sparking international sanctions, prices don't go down.
Below is a breakdown of Russia & Ukraine's position in the global commodity market, recent price reactions and European inflation.
Russia's dominance in the global commodity market goes without saying. So, the recipe of war plus sanctions doesn't exactly augur well for the global economy.
Moreover, Ukraine is not an insignificant player and is a major exporter particularly in agricultural markets, further dampening the world's food supply.
As one might expect, energy prices are skyrocketing following Russia's invasion of Ukraine...
Case in point: Dutch Natural Gas is up +37% just in the last five days, raising its year-to-date gains to a blistering +73% (reminder, YTD only represents a two-month period at the moment).
Meanwhile... Coal is up +75% in the last five days, surging an insane +127% this year alone.
With rampant price pressures across the entire supply chain, food prices may soon become unbearably high (particularly in Europe).
Natural Gas up --> Fertilizer costs up --> Food prices up
- Corn is up +5% in the past 5 days, pushing its YTD gains to +25%
- Wheat is up +12% over the last 5 days, now up over +37% this year
Can Europe bear the brunt of further price increases?
Short answer: No.
Eurozone inflation just hit another all-time high, with the February flash rate rising to +5.8% YoY, up from January's +5.1%.
The increases were led by:
- Energy: +31.7% (vs. 28.8% in January)
- Food, alcohol & tobacco: +4.1% (vs. 3.5%)
- Non-energy industrial goods: +3% (vs. 2.1%)
- Services: +2.5% (vs. 2.3%)
Without opining upon the use-case for sanctions or whether they're needed or not, a war from one leading commodity exporter to another, PLUS sanctions thrown into the fray, has an undoubtedly frightening impact on global inflation.
