Gold smashes over $2000, West considers Russian oil ban

After steep losses for European stocks last week, more declines are expected as the West considers cutting off Russian oil. 

● DAX falls below 13,000 and into bear market territory
● Oil surges to $130 overnight, before easing back slightly
● Gold spikes to $2000, a 19-month high, before pulling back

Last week European stocks were dumped at the fastest pace on record as investors reacted to the intensifying Russian invasion of Ukraine. The DAX lost over 10% of its value, and the FTSE, 6%, after finding some support from oil majors and resource stocks. As the new week kicks off, there are no signs of bargain hunters, with European indices once again heading for a negative start as investors digest the latest headlines surrounding the war and sanctions.The DAX has gapped below 13000 and heads into bear market territory, falling over 20% from its recent November high, on reports that the West could look to sanction Russian oil, Germany is particularly dependent on Russian energy supplies.

Oil

Oil prices roared high as the market reopened for the week, rising to $130 in frantic trading as the risk of the West banning Russian oil grows and as Iran nuclear talks run into delays. Both benchmarks gained in the region of 20% last week, with the prospect of Iranian oil returning to the market at least limiting some of the upside.

However, developments over the weekend suggest that the revival of the Iran nuclear deal isn’t quite as imminent as hoped. Meanwhile, the prospect of Russia’s oil being cut off would create a major supply shock, which could send oil prices towards $200.

While oil is the market’s principal focus, commodities across the board are surging higher. Last week, metals such as aluminium, zinc, and nickel rose 15%, 12%, and 19%, respectively, on supply fears, while wheat jumped 60%.

Stagflation

The impact of the surging commodity prices will be surging inflationary pressures at a time when inflation is already at 30 and 40-year highs. Meanwhile, growth could stall, and a recession, particularly in Europe, is looking increasingly likely.

This puts the ECB between a rock and a hard place when they meet later this week to announce their monetary policy decision. Central banks will need to start choosing between inflation and growth. Given the very real problem of stagflation, the ECB will want to remain flexible, with the prospect of any rate hike being pushed further back, hitting the euro. EURGBP trades around a five-year low amid stagflation fears, while EURUSD trades at a fresh 20 year low.

Gold

Gold spiked to a 19-month high of $2000 overnight amid the ongoing flight to safety, motored by the escalating Russian, Ukraine crisis. The prospect of prolonged war and an oil supply shock fueled the safe-haven bets. However, the price failed to find acceptance at the higher level, and profit-taking quickly took hold, bringing Gold back to around $1980. While risk aversion is buoying Gold prices, the prospect of a more hawkish Fed following Friday’s stellar jobs report could limit the upside. Although today’s light economic calendar will leave Gold at the mercy of risk sentiment.