(Reuters) – Oil prices broke above US$100 a barrel for the first time since 2014, stock markets slumped and the rouble hit a record low on Thursday after Russian President Vladimir Putin launched an invasion of Ukraine.
Markets displayed all the predictable reactions. Europe’s stock markets tumbled nearly 4% (.FTEU3) in frenzied selling while top-rated government bonds, the dollar, Swiss franc, Japanese yen and gold all rallied as traders sought out safety.
U.S. President Joe Biden said “severe sanctions” would be imposed on Russia after the attacks, with Europe’s leaders vowing to also freeze assets and shut Russian banks out of their financial markets. read more
Russian and Ukraine markets went in freefall.
The rouble weakened nearly 7% to an unprecedented 86.98 per dollar, there were record 30% falls on the Moscow stock exchange when it opened after an initial suspension, while Ukraine was forced to suspend trading in its currency as its bonds crashed violently.
“No one expected this and speculation of Putin’s next step will be the major focus of the coming days,” said Hans Peterson, global head of asset allocation at SEB investment management.
“But this does happen in a phase of the business cycle that is quite strong,” he added, saying how high energy and commodity prices now go is also crucial.
The equities rout had started with a 2.6% dive for pan-Asian indexes (.MIAP00000PUS). Europe’s STOXX 600 index (.STOXX) then fell 3.9% – hitting its lowest since May 2021 and more than 10% away from a January record high.
The German DAX (.GDAXI) fell 4.7%, bearing the brunt of the selloff due to heavy reliance on Russian energy supplies and the amounts its companies sell to Russia.
The surge in oil prices helped limit losses on the UK’s commodity-heavy FTSE 100 (.FTSE), although it still slumped 2.3% and futures markets pointed to similar falls for Wall Street later.
S&P 500 e-minis were down over 2% and Nasdaq futures were 2.9% lower in premarket trading, which if it is reflected after the market opens, would confirm the tech-focused index has slumped into a so-called ‘bear’ market.
“In the past when you have had geopolitical flareups you tend to have a very volatile periods on markets then normalisation, but it’s difficult to assess when we will get that,” said LGIM portfolio manager Justin Onuekwusi.
THE COST OF CONFLICT
In the major FX markets, the dollar was up 0.5% against a basket of other top currencies . Almost every asset class has seen a sharp increase in volatility amid the deepening crisis. The Cboe Volatility Index, known as Wall Street’s fear gauge, is up more than 55% over the past nine days. (.VIX)
Fears Russia will now squeeze global energy markets saw Brent futures jump more than 8% past $100 a barrel for the first time since September 2014. Nearly 40% of the European Union’s natural gas and 26% of its crude oil comes from Russia.
With both Ukraine and Russia also big crop producers, wheat and corn prices surged over 5%, while gold jumped more than 1.7% to its highest since early January 2021.
That dive for safety also saw yields on Germany’s AAA-rated government bonds drop 10 basis points to 1.119%, the lowest in three weeks. . The benchmark U.S. 10-year yield was down sharply too, going as low as 1.85% from its U.S. close of 1.977%.
Investors have also been grappling with the prospect of imminent policy tightening by the U.S. Federal Reserve aimed at combating surging inflation. The question now is whether the conflict will give central bankers a reason to delay those moves or whether the further rise in energy prices could spur them on.
While expectations of an aggressive 50-basis-point hike at the Fed’s March meeting have eased, Fed funds futures continue to point to at least six rate hikes this year. FEDWATCH
“Markets are now more adequately pricing in the risk of something horrific happening. That, combined with the uncertainty, is a horrible environment to be in. No one wants risk exposure when that’s floating around,” said Rob Carnell, head of Asia Pacific research at ING.