The war in Ukraine is still ongoing, and there’s no clear end in sight.
At the end of August, the president of Russia even signed a new proclamation that directs the Russian government to expand the size of Russia’s military. A directive that appears to signal Russia is digging in for the long haul.
However, the geopolitical landscape isn’t static—it’s ever-changing—which means an abrupt ceasefire or truce could pop up at any moment, no matter how unlikely that may seem at this time.
Considering the tectonic nature of such a development, investors and traders should likely have a plan in place for how to approach the markets when (not if) that moment arrives. This plan might include a list of potential trades to deploy in the event of a truce, or a strategy for risk-managing the overall portfolio—or both.
In either case, a plan of attack can help save precious time when speed and agility are at a premium. Along those lines, investors and traders may want to consider some of the following themes when the potential for a ceasefire/truce arises.
Energy Sector: Crude Oil and Natural Gas
Russia is a key player in the international energy markets, which is why crude oil prices spiked sharply when Russia expanded its military conflict with Ukraine in the spring of 2022.
Crude oil prices have moderated in recent weeks, but they are still trading about $20/barrel above where they started earlier this year. If the conflict in Eastern Europe were to wind down, temporarily or otherwise, crude prices would likely see a move lower.
However, that drop could be short-lived because the absence of war in Europe could also be a big positive for the global economy, which in turn could be bullish for oil.
Natural gas, on the other hand, looks ripe for a major correction in the event of a truce or ceasefire. Gas prices have skyrocketed in the last eight weeks and are now trading above $9/mmBtu. The last time natural gas rallied to such heights was in 2008.
A truce in Eastern Europe would almost certainly catalyze a sharp correction in natural gas prices, and that’s something that opportunistic investors and traders could likely capitalize on.
To track and trade natural gas, readers can add the following tickers to their watchlists:
- Antero Resources Corporation (AR)
- Cabot Corporation (CBT)
- Cheniere Energy (LNG)
- Chesapeake Energy (CHK)
- Chevron Corporation (CVX)
- Coterra Energy (CTRA)
- DCP Midstream LP (DCP)
- EQT Corporation (EQT)
- iPath Series B Bloomberg Natural Gas Subindex Total Return ETN (GAZ)
- Kinder Morgan (KMI)
- ProShares Ultra Bloomberg Natural Gas (BOIL)
- ProShares UltraShort Bloomberg Natural Gas (KOLD)
- Range Resources Corporation (RRC)
- Southwestern Energy (SWN)
- United States 12 Month Natural Gas Fund LP (UNL)
- United States Natural Gas Fund LP (UNG)
- Vermilion Energy (VET)
- Western Midstream Partners (WES)
Russia accounts for a significant percentage of total global fertilizer production. For example, estimates suggest that Russia is responsible for roughly 23% of global ammonia production, 14% of global urea production, and 21% of global potash production.
But as a result of the war, Russia has limited exports of those products, which in turn has served to push up prices. During H1 2022, phosphate prices surpassed the US$1,000 per metric ton (MT) level for the first time since 2008, while spot potash values reached an all-time high of US$1,210 per MT.
Some of the upward momentum has dissipated in Q3, but values remain historically high. That means that any softening of relations between Ukraine and Russia would likely be a huge catalyst in the global fertilizer market. Much like natural gas prices, it’s almost certain that fertilizer prices would weaken in the wake of a truce or ceasefire.
To track and trade the fertilizer market, readers can add the following tickers to their watchlists: Bunge Limited (BG), CF Industries Holdings (CF), Compass Minerals International (CMP), Intrepid Potash (IPI), LSB Industries (LXU), Mosaic Company (MOS), Nutrien Ltd. (NTR), and The Scotts Miracle-Gro Company (SMG).
Foreign Currency Market
As a result of skyrocketing energy prices in Europe, economic growth in the Eurozone has been anemic in recent months. That in turn has weighed on the major currencies in that part of the world—most notably, the euro.
In 2022, the euro has dropped so much in value that it’s once again trading near 1-to-1 parity with the U.S. dollar—a level last observed in 2002.
If a ceasefire or truce develops between Russia and Ukraine, it’s almost certain the euro would be a big beneficiary. This would allow the European central bank to start raising interest rates—a monetary tightening process that’s already well underway in other parts of the developed world.
The Eurozone has been slow to raise rates because of the fragile state of the economy, which is at least partially attributable to the war in Europe, and sky-high energy prices.
An end to the hostilities—temporary or otherwise—would almost certainly provide European central bankers with the confidence to adopt a more hawkish posture on interest rates. And higher interest rates are almost always bullish for the local currency (i.e. the euro).
To learn more about trading the foreign currency market, review this episode of Splash Into Futures on the tastytrade financial network. Additionally, this recent Luckbox post focusing on forex options is recommended.
For daily updates on everything moving the markets, tune into TASTYTRADE LIVE—weekdays from 7 a.m. to 4 p.m. CDT.
Sage Anderson is a pseudonym. He’s an experienced trader of equity derivatives and has managed volatility-based portfolios as a former prop trading firm employee. He’s not an employee of Luckbox, tastytrade or any affiliated companies. Readers can direct questions about this blog or other trading-related subjects, to firstname.lastname@example.org.