Global financial markets are pricing in geopolitical risk amid US claims of rising tensions between Russia and Ukraine
NATO announced this week it was putting forces on standby and reinforcing Eastern Europe with more ships and fighter jets, as the US continues to accuse Russia of gearing up to invade Ukraine. Moscow has repeatedly denied planning to attack its neighbor, with the Kremlin insisting Russian forces are not preparing for war.
- How are global markets reacting to the crisis?
Volatility has gripped the global equity markets, which saw a widespread sell-off this week, as fears of conflict rattled investors. European stocks suffered double-digit losses on Monday, tumbling by 3.8% to their lowest levels since October. Some £53 billion ($71.5 billion) has been wiped off the value of the UK’s blue-chip share index. US stocks were sold off in a tumultuous Wall Street session, while Asian markets were also being dragged lower. “I think we will see a tug of war in the market for this week,” Carlos Casanova, senior economist at UBP, was quoted as saying by Reuters.
- How has the crisis affected the Russian & Ukrainian economies?
Media reports of rising tensions have hit both economies. Russian stocks and bonds took a further hit this week, with the ruble falling to a one-year low, dropping 2.5% to more than 79 rubles to the US dollar. The Bank of Russia said it was halting purchases of foreign currency in an attempt to ease pressure on the domestic currency. Ukraine’s currency, the hryvnia, has also weakened to a more than one-year low, plunging 4.5% since the beginning of 2022. According to the Bloomberg index, Ukraine’s foreign bonds have lost 7.5% this year in dollar terms, the worst performance in emerging markets after Argentina.
- Where do international investors seek safety?
Investors rushed to safe-haven assets such as the US dollar and the Swiss franc, which hit a six-year high against the euro. Another safe-haven currency is the Japanese yen, which firmed a bit against the dollar, but later weakened 0.01% versus the greenback at 113.69 per dollar. The price of the traditional safe-haven gold has also been rising.
- How’s the crypto world coping?
The sell-off in risk assets also hit cryptocurrencies, with Bitcoin hitting a six-month low of about $33,000, less than half its all-time high of $69,000 reached last November. Other cryptos also slumped, with the second-largest digital coin, Ether, down 13% to $2,202, its lowest since July 27. “Bitcoin will face headwinds going back up until the macroeconomic conditions change,” Mark Elenowitz, president of Horizon Fintex, told Euronews.
- What’s happening with commodities?
Tough sanctions against Russia will rattle commodity markets and prices will soar. Russia is a commodities powerhouse, with it being a key supplier of energy, metals, and agriculture. Energy prices have also been elevated, with the wholesale day-ahead cost of UK gas jumping 17% and the price of crude reaching a seven-year high near $90 per barrel. Russia is a critical route for oil and gas flows to Europe. Prices for Russian Urals crude, which ships via Ukraine, have increased from $68.35 per barrel on December 2 to $87.25/b as of January 21, according to Platts. European gas prices, which have surged on winter demand, continue to rise further as Ukraine is an important transit country for Russian energy supplies to the continent. Benchmark European gas contract TTF DA is up more than 300% year on year in January and experts say that any conflict impacting gas supplies to Europe would have a knock-on impact on power, causing a spike in electricity and heating prices.
- What else is weighing on the global economy?
The key driver behind the global markets’ turmoil is the deepening geopolitical crisis amid reports that the situation along the Russia-Ukraine border is worsening. However, the persistent worries about policy tightening from the US Federal Reserve against the backdrop of high inflation and the ongoing Covid-19 pandemic also weigh heavily on risk trends.
- What lies ahead?
The magnitude of the global sell-off suggests that the reported tensions between Russia and Ukraine aren’t fully priced into the markets, analysts have said, warning of more profound losses lying ahead if the crisis deepens. The situation presents substantial uncertainties for foreign currency markets. In the financial sector, the risk is concentrated in Europe, according to calculations by JPMorgan. It said the tensions risked a “material spike” in oil prices, warning that a rise to $150 a barrel would reduce global GDP growth to just 0.9% annualized in the first half of the year, while more than doubling inflation to 7.2%.
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