Issue of the week: Ukraine and the markets
The immediate shock might be transitory, but the economic fall-out wouldn’t be
For markets, it was something of a “St Valentine’s Day massacre”, said The Trader in Investors’ Chronicle. Mounting tensions between Russia and Ukraine were largely shrugged off earlier this year; but reports that a war could start “within days” concentrated minds. The FTSE 100 lost 2% on Monday; shares in Frankfurt and Paris were down by more than 3%. Banks took a hit on fears that Russia “could be cut off from the SWIFT payments network”. Travel stocks, including IAG, Tui and Wizz Air, were whacked. And although the price of Brent crude futures rose above $96 “to the highest in almost eight years”, BP shares fell due to its stake in Rosneft, the Russian energy giant. Wall Street was also gripped by geopolitical jitters, said DealBook in The New York Times. The situation eased after Russia’s pledge this week to withdraw troops. But “Western officials have cautioned that an invasion of Ukraine is still possible”, and “markets are still worried”: US stock futures fell on Wednesday.
Even if Russian tanks do roll across the border, said Matthew Lynn on Spectator.co.uk, the financial “carnage” won’t last. “True, the most serious armed conflict on European soil since the end of WWII is a serious matter. But geopolitical events rarely make much difference to the markets for more than a few days.”
We saw that after 9/11, after JFK’s assassination, after the Suez crisis, and after North Korea invaded the South in 1950. Granted, a Russian invasion could have “long-term consequences for the global economy” – particularly if it’s part of a “pact with China” that marks the birth of a Sino-Russian economic order, threatening US dominance. But that “would play out over decades”; it’s hardly an immediate threat.
The real problem, said Darren Dodd in the FT, is the impact of anxiety on existing market conditions. In commodities, Ukraine tensions have worsened an already worrying inflationary “crunch”. Gas prices in Europe (where lower flows from Russia have left storage facilities only a third full) have been driven still higher. Sanctions on Russia, meanwhile, could have a severe effect on raw materials prices, especially metals – supplies of which are already badly depleted. “Major exchanges have less than one week’s supply of copper stocks”; supplies of aluminium (now at a 13-year price high) are also low. “This is the most extreme inventory environment,” noted a Goldman Sachs analyst: it’s “unprecedented”. The impact of war on investment portfolios “may be hard to discern”, said Jon Sindreu in The Wall Street Journal – but it would certainly stoke already rampant inflation. “The optimum outcome is that nobody pushes the button.”