Restrictions on Russian debt trading ‘could affect emerging’ and agricultural markets: Strategist

Medley Global Advisors Global Macro Strategy Managing Director Ben Emons joins Yahoo Finance Live to discuss markets expected to be affected by the Russia-Ukraine crisis, including the European market, debt trading, energy, and the agricultural sector.

Video Transcript

BRAD SMITH: Welcome back to Yahoo Finance Live, everyone. We're going to take a quick look at oil prices as we've been tracking this very closely amid the international conflict taking place between Russia and Ukraine. As we're taking a look at your screen, WTI Crude Oil, you're seeing that up on the day by about 1.9%. That hitting $95 a barrel. Additionally, Brent Crude, that's still holding on to a $95 a barrel, $95.90 roughly. It's up right now by about 1 and 1/2%.

Also, I want to take a look at ticker symbol RBOB, R-B-O-B, as you are seeing that up on the day right now and holding onto gains of about 1% up 4.3% over the past five days. We'll keep close tabs on this going into the close as well, everyone. For right now, let me toss things back on over to Emily.

EMILY MCCORMICK: Well, as Brad was mentioning, in energy markets, all eyes are on new developments around the conflict with Russia and Ukraine as crude oil prices hover at their highest level in seven years. Our next guest joins us now for more.

Ben Emons is Medley Global Advisors, Global Macro Strategy Managing Director. Ben, thank you so much for joining us this afternoon. We're starting to hear calls for Brent to jump even beyond $100 per barrel and potentially reaching $120. Is that your base case right now, given what's going on geopolitically?

BEN EMONS: Hi, Emily. There's certainly a geopolitical risk premium, as we see, attached to oil now because in the event that this does lead to a real conflict, most participants in the energy markets anticipate that this will lead to major gas supply disruptions coming particularly from Ukraine to Germany. And that is, supply in Germany with about 35% of its gas supplies. So they're going to have to get the energy from somewhere else.

Now, though, the US has supplied a lot of energy, a lot of gas to Germany into Europe, it's probably not enough. And this is why that Brent contract that you're showing at the start of the segment continues to rise more. And that's pulling up also the other contract, WTI. So it's all in movement.

But also highlight, though, that we're in an environment where energy demand is just significant. It's driven by this really cold air that we're having both here in the United States as some other parts of the globe, so the winter effect. But it's also that the reopening of the economies as Omnicom fades is just boosting energy demand for the travel and all the other reasons. And so it's a combination of geopolitical tension. And economic factors are driving these oil prices higher.

EMILY MCCORMICK: So in terms of the Russia-Ukraine conflict, what outcome do you think crude oil prices have priced in at these levels? Is there an invasion that's being priced in? What level of sanctions do you think markets are currently anticipating? And with that in mind, how much further upside could there potentially be if some of these outcomes aren't fully priced yet?

BEN EMONS: Well, an interesting question how the crude markets is exactly pricing in, but I can definitely say that in the financial markets, if you look at, say, ETFs that are tied to Russian banks and Russian energy companies, those are down 10%, 15%. So there's certainly an anticipation there that in the event that there will be escalation and the severe sanctions follow that the Russian banking system will be crippled as a result.

When it comes to the crude markets, just we could test towards the $100 a barrel, I think it's very much driven more by the demand for energy in general and just this geopolitical risk that we're dealing with. Nevertheless, the inversion that you showed, the backwardation of the gas futures in Europe, that is very severe. So it does show there's a crunch priced in that if there is any conflict, that leads to naturally this disruption.

Also, in addition, if Nord Stream 2 will not not go forward, rifles would be another disruption to gas supplies that you could tell that there is a tension that markets anticipate that this is near and it could happen. So good thing, Russia this morning they were de-escalating headlines coming out. But we have to watch this. I think for now, there remains this tension in the market that we haven't seen the end of this yet. The meeting tomorrow with the prime minister-- sorry-- German Chancellor Scholz and Putin is really key critical meeting for what flows out of that. So everyone is watching it.

EMILY MCCORMICK: And based on the meeting, the phone call that took place between President Joe Biden and Russia's President Vladimir Putin on Saturday, Biden said that the US and its allies would impose swift and severe cost on Russia in the event of a military attack in Ukraine. I'm wondering, what contours do you think any potential sanctions could potentially occur in the event of a military attack? And how would that affect, not only Russia, but potentially Europe, US Allies, and potentially even trickle down to having an impact on the US itself?

BEN EMONS: Well, the key, say, financial sanctions that have been out there that has really I think affect the markets more or more significantly is that Russia will be turned off from the Swift system. That's the international payment system. That is unlikely to happen because that would not only affect Russia negatively, but also affect the US banking system negatively, as well as European banks.

There's exposure [INAUDIBLE] in Europe that have outstanding loans to Russian banks, something of the nature of about 35 billion euros or so. So I don't think that will happen. But what we can expect is export controls, that's particularly towards energy related. It can also be that there's further restriction on trading Russian sovereign debt in the secondary markets.

This, by the way could then affect any broader emerging markets. Because they're all linked with one another. So anything that happens with Russian debt will impact, say, Brazilian debt, and as well as just general sanctions, I think, of like export and import controls for goods. That, of course, can affect the agricultural markets because Russia is a big exporter of wheat, for example. And wheat has been one of those commodities, too, has been very reacting to this conflict at this moment.

- And one thing you also mentioned in your notes to us is pointing out that the energy sector in Europe has underperformed the energy sector in the US, which of course, has in turn outperformed the broader S&P 500 here. Do you think this course corrects in Europe that we see this underperformance-- this relative underperformance in European energy markets-- really get resolved if a diplomatic resolution is found? Or are there still other structural challenges facing the European energy market that aren't present in the US?

BEN EMONS: I think the latter is definitely true. Because take the gas situation that we had earlier in the fall that had nothing to do with Russia. That was really driven that there was not enough wind output in the UK. And therefore, they couldn't generate enough renewable energy and had to rely on gas supplies that were no longer there.

It is known that Germany shutting down its nuclear facilities also therefore drove up the demand for gas. And in the Netherlands, there is a big gas field that has also been shut down partly because, of course, of the seismic activity. So I think all of that has actually affected the energy sector in Europe more negatively for that matter. They're more reliant now on foreign energy, either coming from the United States or coming from Russia in this case.

So I think that is part of the reason why you have that gap between US and European energy equities in this case. It's the same on the credit markets. The spreads for European high yield bonds for energy are much wider than those for the US. So I think that indicates that there are stresses here because the demand for energy is so high as a result of this reopening that we continue to be in against that geopolitical tension and conflict with Ukraine.

That therefore, the credit stress is building in the European energy market. So we have to carefully watch that. It could get worse.

- All right, we'll leave it there for now. Something we're certainly closely watching in the near term. Ben Emons is Medley Global Advisors' global macro strategy managing director. And we thank you so much for your time.