Wayne Cole

SYDNEY, (Reuters) – Oil prices rose Monday as investors were concerned that Russia would invade Ukraine. This could lead to sanctions which could cause an increase in energy costs and exacerbate global inflation.

Russia raised the bar in diplomatic high-stakes games by expending military drills to Belarus. Maxar satellite imagery showed several new field deployments for armour, troops and other equipment near the border to Ukraine.

A French adviser told President Emmanuel Macron that Russia and France had reached an agreement to hold a meeting at the Organization for Security and Co-operation in Europe on Monday.

In early action, oil prices rose almost 2% and Treasury futures strengthened. Nasdaq futures dropped 0.6%, while Nasdaq fell 1.2%. U.S. markets will be closed Monday, but futures can still trade.

MSCI’s Asia-Pacific share index outside Japan fell 0.4% while it lost 1.9%.

BofA’s latest survey of global fund manager confirmed the bearish trend as cash holdings rose to their highest level since mid 2020. The largest share of funds that were overweight in energy was in the past ten years, while the least underweight were in technology for the last 15 years.

Markets are also concerned by the possibility of aggressive U.S. Federal Reserve tightening as inflation continues to run rampant. Core inflation, the Fed’s preferred measure of inflation, is expected to rise at 5.1% annually this week. This is the highest rate of growth since the 1980s.

Bruce Kasman (JPMorgan (NYSE:), chief economist) stated that “January inflation readings surprised materially towards the upside.”

We expect the Fed to raise 25bps (basis points), at the nine next meetings. The policy rate will be close to neutral by the beginning of next year.

This week at most six Fed officials will speak. Markets are going to be extremely sensitive to their opinions on possible 50-basis point increases in March.

Recent comments have argued against such drastic steps and futures now offer a chance for a half point rise, at around 20%. This is down from an average of 50% one week ago.

Short-term Treasuries saw some improvement in their last week’s losses. However, the curve bull remained flattened because of safe-haven purchasing which brought 10-year yields down by 1.92%.

The currency markets are relatively calm, with only a slight increase in volatility over the past week. Last trading was at 96.100. This is well below its recent peak of 97.441.

While the euro is still holding steady at $1.1317 it could be vulnerable if Russia launches a war on Europe. Dollar has been less successful than the Japanese currency, which is a safer-haven and last stood at 114.91, with threatening support at 112.78.

This is gold’s best friend, as it has gained strength from being one of the oldest safe harbors. Gold reached nine-month highs last month and was at $1,903/ounce.

Monday’s oil price rise came after the markets suffered their first weekly losses in over two months. However, there were tentative signs of progress regarding an Iran deal that could allow new supply to be released into the market.

However, an agreement still seems distant and could be countered by sanctions on Russia, a major oil producer.

Sunday’s rejection by Arab oil-producing nations of calls for more oil was a sign that OPEC+ – the group of OPEC members and other suppliers, including Russia – must stick with its existing agreement to increase oil production to 400,000 barrels per day.

It rose from $1.22 to 94.76 per barrel to $1.76, and then shot up $1.76 to $92.83.