Category: Breaking News

U.S. stock futures are flat ahead of Wednesday’s Fed meeting

Stock futures were flat in overnight trading after the major indexes rallied and oil prices tumbled below $100 a barrel ahead of Wednesday’s Federal Reserve meeting.

Futures on the Dow Jones Industrial Average dipped 40 points, while S&P 500 futures fell 0.1% and Nasdaq 100 futures were flat.

The gains came ahead of a critical Federal Reserve meeting on Wednesday, where the agency is widely expected to raise rates by a quarter-point, the first hike since 2018. Watchers are also expecting the central bank to offer a new quarterly forecast that could indicate five or six more hikes this year.

“My guess is it’s going to sound a little more hawkish than people want it to sound, and that’s going to be a little tough to digest, particularly in the fixed income markets,” David Zervos, chief market strategist at Jefferies told CNBC’s “Closing Bell” on Tuesday. “I think the equity market might digest it a little bit better, but it’s going to be a tough swallow.”

The Fed is expected to announce an interest rate decision and economic projections at 2 p.m. on Wednesday, which will followed by a briefing from Federal Reserve Chair Jerome Powell.

Meanwhile, oil prices cooled off on Tuesday, dropping below $100 after topping a multiyear high of $130 earlier this month, while commodities such as gold, which have been volatile in recent days, fell 1.59%.

The U.S. and global oil benchmarks both settled below $100 a barrel, with West Texas Intermediate and Brent crude falling 6.4% and 6.5%, respectively. The fallback put pressure on some energy stocks, including Exxon and Chevron, which sank about 6% and 5% on Tuesday.

During regular trading on Tuesday, the Dow Jones Industrial Average gained 599 points, or 1.8%, while the S&P 500 jumped more than 2.1%, and broke a three-day losing streak. Meanwhile, the tech-heavy Nasdaq Composite rose about 2.9%.

“U.S. stocks are trading higher Tuesday as investors react positively to a ‘Goldilocks’ mix of economic reports (lower PPI and eroding Empire survey) and another sharp drop in oil prices — all suggesting that the path to sustained high inflation may be less certain than some think,” wrote Goldman Sachs analyst Chris Hussey in a note Tuesday.

Tuesday’s market rally was broad-based, led by sharp gains among technology stocks. Microsoft rose nearly 4%, while chipmakers Nvidia and Advanced Micro Devices climbed roughly 8% and 7%. Peloton rose 12% after Bernstein initiated coverage of the stock with an “outperform” rating, and Coupa Software plummeted 19% on the back of a weaker-than-expected outlook.

Investors continued to monitor the ongoing situation in Ukraine on Tuesday, as Kyiv announced a 35-hour curfew after Russian missile strikes hit some residential buildings. Meanwhile, President Joe Biden signed a government funding bill that included $13.6 billion in aid to Ukraine.

Some European leaders also announced they will visit Ukraine to meet with the country’s president and prime minister, while Russia is expected to default on its debt for the first time in decades as it nears a Wednesday deadline for two payments.

Traders continued to keep an eye on the situation in China, where one of the country’s largest manufacturing hubs has shut down amid rising Covid-19 cases.

Investors will be watching Ukrainian President Volodymyr Zelenskyy address Congress on Wednesday and are awaiting economic data, including the retail sales report for February.

China says it wants to steer clear of U.S. sanctions over Russia’s invasion of Ukraine

“China is not a party to the crisis, nor does it want the sanctions to affect China,” Wang said Monday during a call with Spanish counterpart Jose Manuel Albares to discuss the crisis in Ukraine.

“China has the right to safeguard its legitimate rights and interests.”

His comments are seen as one of Beijing’s most explicit statements yet on the unprecedented barrage of international sanctions imposed against Russia’s corporate and financial system. The measures came in response to the Kremlin’s full-scale offensive into Ukraine, which began Feb. 24.WATCH NOWVIDEO03:24U.S. warns China about helping Putin with his invasion

The White House has warned China not to provide Russia with an economic lifeline as the Kremlin steps up its onslaught on Ukraine. The U.S. says it fears China, a key strategic ally of Moscow, may seek to cushion the impact of measures designed to destroy Russia’s economy if the war continues.

There are concerns among market participants that Chinese companies could soon become embroiled in financial penalties after reports that Moscow had asked Beijing for assistance to support its Ukraine invasion.

China has denied these reports, while Russia has said it did not request military aid from Beijing.

Since Russia’s attack on Ukraine, Beijing has refused to call it an invasion and said China would maintain normal trade with both countries. China has not joined the U.S., EU and other countries’ sanctions on Russia.

Officials from the U.S. and China met on Monday to discuss a range of bilateral issues, including Russia’s war with Ukraine. The talks, which were held in Rome, spanned seven hours and were described as “intense” by one senior administration official.

The U.S. has warned of consequences for any country that provides Russia with support amid the Kremlin’s conflict with Ukraine.WATCH NOWVIDEO02:55U.S.-China talks on Ukraine war have rendered ‘very little progress’: Think tank

“We are watching very closely to the extent to which the PRC [People’s Republic of China] or any country in the world provides support material, economic, financial, rhetorical otherwise, to this war of choice that President [Vladimir] Putin is waging against the government of Ukraine, against the state of Ukraine and against the people of Ukraine,” State Department spokesman Ned Price said at a news briefing Monday.

“We have been very clear both privately with Beijing and publicly with Beijing that there would be consequences for any such support,” Price said.

Russian Finance Minister Anton Siluanov said Sunday that the Kremlin was counting on China to help it withstand the fallout from global economic measures imposed against Moscow, Reuters reported.

In speaking with Spain’s Albares, China’s Wang reaffirmed Beijing’s long-held stance of objecting to unilateral sanctions outside of the United Nations.

“China always opposes the use of sanctions to solve problems, and even more opposes unilateral sanctions that have no basis in international law, which will undermine international rules and bring harm to the people’s livelihood of all countries,” Wang said.

Galen G. Weston sets out on a new vision for Loblaw, far from the bread wagon days of his family’s roots

Galen G. Weston spent the past year on a corporate diet, slimming down holdings in family-controlled grocery, baking and real estate businesses.

On Monday, Mr. Weston bulked up. The chair and president of Loblaw Cos. Ltd. L-T -1.34%decrease paid $845-million for Lifemark Health Group, a cross-Canada chain of more than 300 physiotherapy, massage, chiropractic and mental-health clinics. Loblaw will roll Lifemark into its Shoppers Drug Mart division and its PC Health online platform.

Buying Lifemark from Boston-based Audax Private Equity gives Mr. Weston a national health and wellness business. Audax bought the business six years ago from pharmacy chain CareRx Corp. for $245-million, then expanded through a series of small acquisitions. Audax’s growth strategy included striking an online booking partnership with Shoppers last November – a first date for the marriage announced on Monday.

Mr. Weston is setting out a new vision for his family’s holdings by acquiring Lifemark while at the same time overseeing Weston-controlled Choice Properties REIT’s sale last week of long-held office buildings for $749-million and parent company George Weston Ltd.’s disposal of an even longer-owned baking business last year for $1.6-billion.

The 49-year-old executive is justifiably proud of corporate roots dating back to 1882, when his great grandfather began delivering fresh bread from wagons. However, he’s far from wedded to that heritage.

Looking back, it’s clear that Mr. Weston began putting his stamp on the family’s holdings in 2017, when he became chair and chief executive officer of George Weston. On his watch, the holding company narrowed its focus to two businesses: retailing under the Loblaw banner and real estate, through Choice Properties. The Toronto-based REIT is one of the country’s largest owners of malls and industrial properties.

The drive to streamline operations picked up steam after patriarch W. Galen Weston – the current chair’s father – passed away last April, with the sale of the baking business and family-owned British luxury department store operator Selfridges, sold in December for an estimated $6.9-billion.

Mr. Weston’s guiding philosophy is spelled out on Choice Properties’ website. The first words that appear are: “Creating enduring value for generations.”

Building long-term wealth means doing more than raising money by exiting a low-growth business such as baking, as Mr. Weston did last year. It means pouring that cash back into the business, trying to position retail and real estate operations for a new generation of customers.

Prior to buying Lifemark, Loblaw invested $75-million in telemedicine company Maple Corp. in 2020, and acquired medical records company QHR for $170-million in 2016. The series of acquisitions, and the arrival of a Lifemark executive team that built their business through M&A, show Mr. Weston sees growth potential in health and wellness that doesn’t exist in grocery stores.

Lifemark is the largest domestic player in a fragmented physiotherapy and rehabilitation space; its executives estimate it has about a 7-per-cent share of an $11-billion market. In a report, analyst Patricia Baker at Bank of Nova Scotia said: “This transaction represents an opportunity for Shoppers and Loblaw to participate in growth associated with rolling up a related health care market segment with a higher-margin profile and to address a new market segment.”

Loblaw used CIBC Capital Markets and law firm Borden Ladner Gervais LLP as its advisers, while Lifemark and Audax were advised by M&A investment boutique Harris Williams and law firms Blake, Cassels & Graydon LLP and Kirkland & Ellis LLP.

Where else will Mr. Weston put capital to work? Bulking up on warehouses and apartment buildings is likely in the cards at Choice Properties. As part of last week’s $749-million sale of six buildings in downtown Toronto, Vancouver and Montreal – Allied Properties REIT was the buyer – Choice Properties CEO Rael Diamond made it clear the company was exiting office properties to focus on retail, industrial and a “growing residential platform.”

Share prices at George Weston, Loblaw and Choice Properties are all up sharply over the past year, as Mr. Weston retooled their holdings. It’s no longer the great grandfather’s baking company, but investors have been well-rewarded by his heir’s strategy.

Oil plunges over 7 per cent on easing supply concerns, China COVID cases

Oil prices tumbled more than 7% to their lowest in almost three weeks on Tuesday as supply disruption fears eased and surging COVID-19 cases in China spurred demand concerns.

Brent futures fell $7.89, or 7.4%, to $99.01 a barrel by 11:51 a.m. EDT (1551 GMT), while U.S. West Texas Intermediate (WTI) crude dropped $8.11, or 7.9%, to $94.90 a barrel.

Brent fell as low as $97.44 and WTI hit $93.54, their lowest since Feb. 25.

Both contracts moved the closest to oversold territory since December. They had been in overbought conditions as recently as early March, when the benchmarks reached 14-year highs after Russia’s invasion of Ukraine. Since then, Brent has lost about $40 and WTI has fallen by more than $30.

The steep decline on Tuesday followed a statement from Russian Foreign Minister Sergei Lavrov, saying that Moscow is in favor of the 2015 Iran nuclear deal resuming as soon as possible.

The talks to revive the nuclear accord, which would lead to sanctions on Iran’s oil sector being lifted and allow Tehran to resume crude exports, had recently stalled because of Russian demands.

At the same time, a Ukrainian negotiator said on Tuesday that talks with Russia over a ceasefire and withdrawal of Russian troops from Ukraine are ongoing.

In the fallout from Russia’s invasion, which it calls a “special operation,” Western sanctions against Russia have failed to deter China and India from buying Russian crude.

Tuesday’s steep price decline surprised several analysts.

“Whilst reports of promising talks (between Russia and Ukraine) are to be welcomed, it is hard to see how either side at this stage would be prepared to make concessions that would be acceptable to any party,” said a research note from Kpler.

“In this current situation, it is hard to see how crude oil prices are not being under-priced.”

Further adding price pressure, China saw a steep jump in daily COVID-19 infections, raising renewed worries about the recovery from the coronavirus pandemic.

China’s daily oil processing rate dropped 1.1% in the first two months of 2022 from a year ago, to the lowest since December 2020, as independent refiners scaled back operations after Beijing slashed their crude oil import quotas.

Meanwhile, the U.S. Federal Reserve is widely expected to raise interest rates by 25 basis points on Wednesday for the first time in four years to fight soaring inflation. Such a move could strengthen the U.S. dollar and dampen demand for commodities priced in the currency.

In addition to the Russia-Ukraine conflict, spare crude production capacity remains limited from the Organization of the Petroleum Exporting Countries (OPEC) and its allies, collectively known as OPEC+.

OPEC said on Tuesday that oil demand in 2022 faced challenges from Russia’s invasion of Ukraine and rising inflation as crude prices soar, increasing the likelihood of reductions to its forecast for robust demand this year.

March 15: At midday: TSX falls as sliding commodities weigh on energy, material stocks

Canada’s benchmark index extended losses for a third straight session on Tuesday, as weakness in energy and metal prices due to rising COVID-19 cases in China weighed on commodity stocks.

At 10:48 a.m. ET, the Toronto Stock Exchange’s S&P/TSX composite index was down 78.98 points, or 0.37%, at 21,101.80.

The energy and materials sectors fell 3.5% and 1% respectively, tracking weakness in commodity prices.

Oil prices dropped to three-week lows and industrial metal prices fell as daily COVID-19 infections in major consumer China doubled from a day earlier to hit a two-year high.

“We’re going to have a volatile year so there’s going to be lots of moving parts,” said Greg Taylor, portfolio manager at Purpose Investments.

“TSX is definitely overweight in commodities versus other indices so as long as inflation’s a theme it should set the TSX to outperform.”

The commodity-heavy Toronto index has declined 1.1% so far this year, but has outperformed many of its global peers like the U.S. benchmark S&P 500, which is down 11.8% year-to-date, as investors embraced commodity stocks to protect their portfolios from the impact of supply shortages and soaring inflation.

Investors await key consumer price data due later in the week, while the U.S. Federal Reserve’s policy meeting due on Wednesday was also in focus.

“There’s probably not going be much volume today as investors are waiting for the Fed’s signals and see if we get any relief in the move higher in yields and the U.S. dollar,” Taylor said.

Data showed that home prices surged to a new all-time high last month and housing starts rose 8% in February compared with the previous month.

U.S. stocks gained ground on Tuesday as oil prices extended declines, while investor focus was squarely on the Federal Reserve’s two-day meeting where policymakers are widely expected to raise interest rates.

Nine of the 11 major S&P sectors advanced in early trading, with technology and consumer discretionary stocks climbing the most.

Microsoft Corp and Broadcom Inc gained 1.6% and 3.9%, respectively, providing the biggest boost to the S&P 500 and the Nasdaq.

Big banks, which tend to benefit from rising interest rates, rose. JPMorgan Chase & Co advanced 1.4%.

Delta Air Lines Inc and United Airlines jumped nearly 9% after the U.S. carriers raised their current-quarter revenue forecasts, even as they trimmed capacity.

Traders see a 91% chance of a 25 basis point rate hike by the U.S. central bank at the conclusion of its meet on Wednesday. However, focus likely will be on projections showing just how far policymakers think rates will need to rise this year and in 2023 and 2024 to tame inflation.

“We’ve been talking about the interest rate hikes for about a year now. So, to finally get it tomorrow and to put it in the rear-view mirror would be a good thing for the market,” said Christopher Grisanti, chief equity strategist at MAI Capital Management in New York.

“There’s space for the Federal Reserve to say yes, we’re worried about inflation, but we’re going to watch carefully and language like that would also be bullish.”

Data on Tuesday showed U.S. producer prices rose solidly in February, and further gains are likely from higher prices of crude oil and other commodities following Russia’s invasion of Ukraine.

The Dow Jones Industrial Average was up 247.38 points, or 0.75%, at 33,192.62, the S&P 500 was up 39.26 points, or 0.94%, at 4,212.37, and the Nasdaq Composite was up 148.51 points, or 1.18%, at 12,729.73.

Meanwhile, a steep jump in daily COVID-19 infections in China, along with a lack of progress in Ukraine-Russia talks to end their weeks-long conflict weighed on sentiment.

Talks discussing a ceasefire and a withdrawal of Russian troops from Ukraine resumed, one of Ukraine’s negotiators said on Tuesday.

Energy shares slid, with Chevron Corp down 6.1%. Crude prices slid to $100 a barrel as fresh COVID curbs in China weighed on demand outlook, after scaling as much as $139 last week on fears of supply disruptions following Western sanctions on Russian oil.

“There is some good news. Oil is down a lot today, but I don’t think the market will get any longer-term direction until there’s some clarity on the Ukrainian invasion and how that’s going to play itself out,” Grisanti added.

The CBOE volatility index, also known as Wall Street’s fear gauge, slipped but held above 30 points.

Wholesale prices soar 10% in February, highest level on record

Surging demand for travel and soaring fuel costs ‘a perfect storm’ for airplane tickets, cruise prices

If you’re pondering a vacation, you may want to finalize your bookings soon.

Soaring energy costs and the unleashing of pent-up demand for travel amid loosening COVID-19 restrictions are likely to push up the prices of flights, vacation packages andcruises.

“I call it a perfect storm,” said Martin Firestone, president of the travel insurance brokerage Travel Secure Inc. The combination of those two factors, he added, will likely send prices “through the roof.”

While the costs of flights, hotel rooms and other travel services fluctuate frequently, in some cases it’s already evident there’s an upward price trend.

Richard Vanderlubbe, president of Tripcentral.ca, an Ontario-based travel agency that focuses on international trips, said price increases for the vacation packages his company monitors started outnumbering price decreases on a daily basis in late January.

By the middle of February, when Ottawa announced it would relax key restrictions on international travel by the end of the month, price increases outnumbered decreases by 14 to one, he said.

Change in average flight prices, March 2022 vs. March 2019

Travel will likely cost more this spring and summer, though Canadians can still find deals, especially on popular domestic routes.

KAYAK considered searches originating in Canada for domestic and international travel from March 2–8, 2022 for travel between March 8–Sept. 8, 2022. To compare year over three years, KAYAK considered searches originating in Canada for domestic and international travel from March 2–8, 2019 for travel March 8–Sept. 8, 2019.

THE GLOBE AND MAIL, SOURCE: KAYAK

The government also scrapped its requirement that children under 12 travelling with vaccinated adults wait 14 days before attending school or camps after returning from international trips.

The rule changes sparked a flurry of bookings for March and April from Canadians who saw a chance to flee winter with trips to sunny destinations, according to Mr. Vanderlubbe.

Like travel packages, airline tickets are also becoming more expensive. International flight prices for Canadians were up 36 per cent on average in early March, compared with the same period in 2019, according to an analysis of online searches by the travel-search website Kayak.

And the comparison with prepandemic airfares reveals staggering price increases for certain popular international routes, according to Kayak’s data. For example, the average price of a flight from Vancouver to New Delhi, India, was 83 per cent higher, compared with 2019. The price of a flight there from Toronto was 60 per cent higher.

Within Canada, domestic flight prices were up only 6 per cent compared with 2019. Many popular routes were still significantly cheaper than they were before the pandemic.

The average price of a flight from Toronto to Vancouver, for example, was nearly 40 per cent lower than it was three years ago, the data shows.

Mr. Vanderlubbe offered two possible explanations for the lack of increases in the prices of domestic flights:demand for leisure travel within Canada usually doesn’t start to rise until later in the spring, and domestic demand for business travel hasn’t yet recovered from the pandemic.

Still, even on domestic routes, bargains may not last long, as airlines face mounting costs from spiking fuel prices.

After decisions by several countries to impose sanctions on Russian oil exports, the price of jet fuel has skyrocketed by 27 per cent in the past week, to more than US$141 a barrel. Compared with a year ago, the price has nearly doubled, according to S&P Global Commodity Insights.

The spike has already prompted airlines such as Emirates and Malaysia’s AirAsia to introducefuel surcharges or raise existing ones.

Air Canada declined to discuss how fuel costs might affect its pricing. WestJet said it has no fuel surcharges in place and has made no changes to its pricing system in response to higher fuel costs.

Paul Jacobs, Kayak North America’s general manager and vice-president, said it may take a couple months for the impact of higher fuel costs to affect pricing.

Another corner of the travel sector that will feel financial pain from high fuel costs is the cruise industry, which is starting to see demand return after luxury liners became hotbeds of COVID-19 contagion. Canada relaxed its rules for cruise ship travel on March 7, though the government continues to recommend people exercise caution when travelling on liners.

Royal Caribbean Group said it will not be charging for increases in thecosts of fuelling its ships. Carnival Corporation did not respond to a request for comment on the possible impact of rising fuel prices.

In general, the extent to which Canadians will see price increases on travel will likely depend on when and where they’re going, Mr. Firestone said. Concerns about war in Ukraine could weigh on demand for trips to Europe, he noted.

He said there is no question in his mind that cruise lines, airlines and tour companies will eventually need to pass higher costs on to consumers.

Oil falls around $5 a barrel on Russia-Ukraine talk hopes, COVID-19 surge in China

Oil prices fell by around $5 a barrel on Monday as investors pinned hopes on diplomatic efforts by Ukraine and Russia to end their conflict, while a surge in COVID-19 cases in China spooked the markets.

Brent was down by $4.62, or 4.1 per cent, at $108.05 a barrel at 1152 GMT, and U.S. West Texas Intermediate (WTI) crude fell $5.45, or 5 per cent, to $103.88 a barrel.

Both contracts have surged since Russia’s Feb. 24 invasion of Ukraine and are up roughly 40 per cent for the year to date.

Ukrainian and Russian negotiators are set to talk again on Monday via video link. Negotiators had given their most upbeat assessments after weekend negotiations, suggesting there could be positive results within days.

“Beside new talks between Ukraine and Russia, I guess new lockdowns in China are the reason for a negative start of the week for crude oil,” said UBS analyst Giovanni Staunovo.

China, the world’s largest crude oil importer and second largest consumer after the United States, is seeing a surge in COVID-19 cases, as the highly transmissible Omicron variant spreads to more cities, triggering outbreaks from Shanghai to Shenzhen.

Its daily new case load figures have hit two-year highs, with 1,437 new confirmed coronavirus cases reported on March 13.

“This week, market participants are closely tracking how Russian oil exports are evolving. So far this month oil flows had not been disrupted,” Staunovo added.

Russia’s output of oil and gas condensate rose to 11.12 million barrels per day (bpd) so far in March, two sources familiar with oil production data told Reuters, despite sanctions on Russian oil.

India is also considering taking up a Russian offer to buy its crude oil and other commodities at discounted prices with payment via a rupee-rouble transaction, two Indian officials said.

The United States has announced a ban on Russian oil imports and Britain said it would phase them out by the end of the year. Russia is the world’s top exporter of crude and oil products combined, shipping around 7 million bpd or 7 per cent of global supplies.

British Prime Minister Boris Johnson is trying to persuade Saudi Arabia to increase its oil output, a senior minister said, following reports that Johnson would travel to the OPEC heavyweight this week.

International Energy Agency (IEA) chief Fatih Birol on Monday urged oil-producing countries to pump more to stabilize markets.

“Oil prices might continue moderating this week as investors have been digesting the impact of sanctions on Russia, along with parties showing signs of negotiation towards (a) ceasefire,” said Tina Teng, an analyst at CMC Markets.

Oil prices also came under pressure after India said it will take “appropriate” steps to calm the rise in oil prices, indicating the country could release more oil from its national stocks if required.

Investors are also closely watching the U.S. Federal Reserve meeting this week. The Fed is expected to start raising interest rates, which would boost the dollar and put downward pressure on oil prices.

Oil prices typically move inversely to the U.S. dollar, with a stronger greenback making commodities more expensive for holders of foreign currencies.

As Russia nears a debt default, talk now turns to global contagion

Russia is on the brink of defaulting on its debt, according to ratings agencies and international bodies, but economists do not yet see a global contagion effect on the horizon.

International Monetary Fund Managing Director Kristalina Georgieva said Sunday that sanctions imposed by western governments on Russia in response to its invasion of Ukraine would trigger a sharp recession this year. She added that the IMF no longer sees Russian sovereign debt default as an “improbable event.”

Her warning followed that of World Bank Chief Economist Carmen Reinhart, who cautioned last week that Russia and ally Belarus were “mightily close” to defaulting on debt repayments.

Despite the high risk of default, however, the IMF’s Georgieva told CBS that a wider financial crisis in the event of a Russian default was unlikely for now, deeming global banks’ $120 billion exposure to Russia “not systematically relevant.”

However, some banks and investment houses could be disproportionately affected. U.S. fund manager Pimco started the year with $1.1 billion of exposure to credit default swaps — a type of debt derivative — on Russian debt, the Financial Times reported last week. A spokesperson for Pimco wasn’t immediately available for comment when contacted by CNBC.

The Russian state has a host of key payment dates coming up, the first of which is a $117 million payment of some U.S. dollar-denominated eurobond coupons on Wednesday.

Credit ratings agency Fitch last week downgraded Russian sovereign debt to a “C” rating, indicating that “a sovereign default is imminent.”

S&P Global Ratings also downgraded Russia’s foreign and local currency sovereign credit ratings to “CCC-” on the basis that the measures taken by Moscow to mitigate the unprecedented barrage of sanctions imposed by the U.S. and allies “will likely substantially increase the risk of default.”WATCH NOWVIDEO03:41Moody’s downgrades Russia’s credit rating in an ‘unprecedented’ way

“Russia’s military conflict with Ukraine has prompted a new round of G7 government sanctions, including ones targeting the foreign exchange reserves of The Central Bank of Russia (CBR); this has rendered a large part of these reserves inaccessible, undermining the CBR’s ability to act as a lender of last resort and impairing what had been – until recently – Russia’s standout credit strength: its net external liquidity position,” S&P said.

Moody’s also slashed Russia’s credit rating earlier this month to its second-lowest tier, citing the same central bank capital controls likely to hinder payments in foreign currencies, resulting in defaults.

Moscow moved to strengthen its financial position following a suite of western sanctions imposed in 2014, in response to its annexation of Crimea. The government ran consistent budget surpluses and sought to scale back both its debts and its reliance on the U.S. dollar.WATCH NOWVIDEO02:10Scholar discusses China’s position on U.S. and EU sanctions on Russia

The accumulation of substantial foreign exchange reserves was intended to mitigate against the depreciation of local assets, but reserves of dollars and euros have been effectively frozen by recent sanctions. Meanwhile, the Russian ruble has plunged to all-time lows.

“To mitigate the resulting high exchange rate and financial market volatility, and to preserve remaining foreign currency buffers, Russia’s authorities have – among other steps – introduced capital-control measures that we understand could constrain nonresident government bondholders from receiving interest and principal payments on time,” S&P added.

Grace periods

Russian Finance Minister Anton Siluanov said Monday that Russia will use its reserves of Chinese yuan to pay Wednesday’s coupon on a sovereign eurobond issue in foreign currency.

Alternatively, Siluanov suggested the payment could be made in rubles if the payment request is rebuffed by western banks, a move Moscow would view as fulfilling its foreign debt obligations.

Although any defaults on upcoming payments would be symbolic – since Russia has not defaulted since 1998 – Deutsche Bank economists noted that nonpayments will likely begin a 30-day grace period granted to issuers before defaults are officially triggered.WATCH NOWVIDEO05:53We could be heading for World War III if Russia joins forces with China, investor says

“Thirty days still gives time for there to be a negotiated end to the war and therefore this probably isn’t yet the moment where we see where the full stresses in the financial system might reside,” Jim Reid, Deutsche Bank’s global head of credit strategy, said in an email Monday.

“There has already been a huge mark to market loss anyway with news coming through or write downs. However, this is clearly an important story to watch.”

Russian assets pricing in defaults

Trading in Russian debt has largely shut down since the web of sanctions on central banks and financial institutions was imposed, with government restrictions and actions taken by investors and clearing exchanges freezing most positions.

Ashok Bhatia, deputy chief investment officer for fixed income at Neuberger Berman, said in a recent note that investors will be unable to access any liquidity in Russian assets for some time. Bhatia added that prices for Russian government securities are now pricing in a default scenario, which Neuberger Berman strategists think is a likely outcome.

“It’s unclear why Russia would want to use hard currency to repay these securities at the moment, and we expect much of this debt to enter ‘grace periods’ over the coming month,” he said.WATCH NOWVIDEO04:38Russia’s economy will limp on without much deeper dislocation, strategist says

“Russian hard currency sovereign securities are indicated at 10 – 30 cents on the dollar and will likely remain there.”

Bhatia suggested that the key macroeconomic risk arising from the conflict in Ukraine is energy prices, but the spillover pressure to global credit markets will be “relatively muted” with recent volatility across asset classes continuing.

“But given that Russian securities have been repriced to default levels, we believe those immediate impacts are largely over,” he said.