By Moscow’s bullying tactics have turned into a full scale assault, with Ukraine’s worst fears materialised as Russian forces have begun a major attack on the country.
This is a devastating turn of events for citizens in Ukraine who had waited in vain for a diplomatic resolution.
Already the invasion has caused shockwaves across the world’s financial markets as cities in Ukraine have come under fire.
The FTSE 100 has dropped by 2.6% on the open, and France’s CAC 40 and Germany’s DAX are down 4%, following Asian markets deep into the red.
The threat of war had already been hanging over investors, and the shock of the invasion sent the price of oil hurtling up by more than 7% way above $100 a barrel, reaching more $103 before falling back a notch.
Oil and gas prices are likely to stay highly elevated with hard hitting sanctions set to be imposed by the international community market volatility has increased since the beginning of the year, stoked by rising interest rates, and today’s news has added fuel to the market turbulence.
With Ukrainian airspace shut, and fears that renewed optimism of the travelling public will be severely dented with war underway, that’s led to a big slide in airlines and travel sector stocks.
International Consolidated Airlines Group, the owner of British Airways has dropped by around 5% while Wizz Air with its extensive operations across Eastern Europe in particular nosedived by around 8% in early trade.
Rolls Royce, so highly reliant on commercial air travel, was among the biggest fallers on the FTSE 100 given it’s highly reliant on commercial air travel.
Russia exposed stocks like Evraz, the mining and metals company which Roman Abramovich owns a stake in has plunged by around 18%, and Polymetal International with mining operations across Russia has also dropped by 7%.
With tough incoming sanctions expected, their businesses are likely to take a major hit with little respite in sight given the seriousness of the situation.
Stocks with Russian exposure also include BP, via an 19.75% shareholding in Rosneft, and BP also fell on the open, despite the higher oil price which helped push up Shell’s share price.
The risers in the FTSE 100 were few and far between with Bae Systems among them with expectations that defence budgets may be boosted in the face of Russian aggression.
With this rocket flare in international tensions, the rush towards safe havens is underway, and already the US dollar, Japanese Yen and the Swiss franc have been in demand, while the Russian rouble has tumbled to a fresh record low.
Bonds are generally seen as the most reliable assets in a time of emergency, even though this war is also set to fan the flames of inflation.
Gold miner Fresnilllo jumped 4% with expectations there will be a further demand for the precious metal given the intense nervousness on the markets.
There will be pressure on banking stocks, particularly banks in France and Austria as they have the largest exposure to Russian loans.
Lloyds and Barclays were around 5% lower in early trading with nervousness rising about the impact on their lending businesses.
Depending on how long this crisis continues there could be a significant loss of confidence among businesses and consumers here as they may limit borrowing until they feel more confident.
This is likely to be felt the most in Europe, and it could lead to the ECB extending stimulus to help countries cope with the knock on effects of the conflict.
Miners have not been immune to the sell-off, given the shock war has presented, and worries that there could be a downturn in demand for some commodities if the situation escalates further.
Investors are likely to be seeking out more defensive positions in healthcare and pharmaceutical stocks to shelter from market turbulence.
However investors also need to keep their nerve and have an eye on the longer horizon. The shock of conflict is devastating, but history does point to relatively short-lived volatility on financial markets.
Investors should try to look beyond these events and focus on their long-term goals.
Daily market moves are concerning, but trying to transact in periods such as these invariably leads to over-trading and capitalising losses.
Investors should not panic, but take the time to ensure that they have a diversified portfolio with a basket of assets spread across different sectors and geographies.
Giles Coghlan, Chief Analyst, HYCM said:
“Markets have woken to the news that Russian President Putin has ordered a ‘special military operation’ to ‘demilitarise’ Ukraine, just a day after the West imposed new sanctions on Russia.
As military action escalates, we can now expect a steady trickle of further sanctions throughout the day, which will have ramifications across the markets.
In terms of financial impact, the Russian stock market is already down 28%, with the Bank of Russia intervening in FX markets to stabilise the situation.
Up until now, sanctions have been targeted, with the US placing curbs on two state-owned financial institutions and five Kremlin-connected elite.
This will have a measured impact on Russia’s financial system, its defence sector, and its ability to raise funds – but these are not institutions that ordinary Russians bank with.
Going forward, any further sanctions imposed – especially those placed on Russia’s largest state-run banks – could have a sweeping effect on everyday Russian people, as well as the current production of oil and gas.
Just yesterday, the Bank of England’s Governor, Andrew Bailey, stated that there is an upside risk to energy prices from the invasion.
With commodity prices also expected to surge, global stocks are down, as well as bonds bid on safe haven flows.
Right now, the UK FTSE 100 is holding up much better than most of its global counterparts.
Should investors be worried? As sad as the human cost is during this event, financial costs tend to be limited.
A glance back at some of the gravest world events in recent history reminds us of this – the bombing of Syria in 2017, the US withdrawal from Afghanistan and the North Korean Missile crisis, for example, show us the market reaction to these events can be surprisingly mild.
Most dips end up being bought, so medium-term buyers can often find good value in these bleak times.”
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