Daily Management Review

How Global Markets Could Be Impacted By Materialization Of Russia-Ukraine Conflict


How Global Markets Could Be Impacted By Materialization Of Russia-Ukraine Conflict
A hypothetical Russian invasion of Ukraine would have ramifications across a range of global markets, from wheat and oil prices to sovereign dollar bonds in the region, as well as safe-haven assets and stock markets.
Investors typically rush back to bonds, which are viewed as the safest investments, after a large risk event, and this time may be no different, even if a Russian invasion of Ukraine risks further fanning oil prices — and thus inflation.
Inflation, which has reached a high in decades, and the prospect of interest rate hikes have been a recipe for a tense beginning to the current year for bond markets, with US 10-year rates still lingering near 2 per cent and German 10-year yields above 0 per cent - both a first time since 2019. However, a full-fledged battle between Russia and Ukraine might change that.
The euro/Swiss franc exchange rate is recognized as the most important index of geopolitical risk in the eurozone in forex markets since the Swiss currency has traditionally been regarded as a safe haven by investors. In late January, it reached its highest point since May 2015.
Gold is sticking at 13-month highs, making it a safe haven in times of conflict or economic distress.
Any disruption in the movement of grain out of the Black Sea region is expected to have a significant influence on pricing and fuel food inflation at a time when affordability is a major problem around the world as a result of the Covid-19 pandemic's economic harm.
Ukraine, Russia, Kazakhstan, and Romania, four key exporters, ship grain from Black Sea ports that might be disrupted by military action or sanctions.
According to estimates from the International Grains Council, Ukraine is expected to be the world's third-largest exporter of corn and fourth-largest exporter of wheat in the 2021/22 season. Russia is the world's leading exporter of wheat.
If tensions escalate into a confrontation, energy markets are likely to be impacted. Around 35 per cent of Europe's natural gas comes from Russia, largely via pipelines that run through Belarus and Poland to Germany, Nord Stream 1, which runs directly to Germany, and others via Ukraine.
Export of gas in terms of volumes from Russia to Europe decreased in 2020 when demand was restricted by lockdowns and did not fully recover last year when consumption soared, helping to drive prices to new highs.
Germany has suggested it may block the new Nord Stream 2 gas pipeline from Russia as part of prospective penalties if Russia invades Ukraine. The pipeline is expected to enhance gas shipments to Europe, but it also emphasizes the continent's reliance on Moscow for energy.
In the case of sanctions, analysts predict natural gas exports from Russia to Western Europe to be considerably cut through both Ukraine and Belarus, with gas prices potentially returning to Q4 levels.
Oil markets may also be impacted by restrictions or disruptions. Ukrainian oil is transported to Slovakia, Hungary, and the Czech Republic. According to S&P Global Platts, Ukraine's passage of Russian crude for sale to the bloc was 11.9 million metric tonnes in 2021, down from 12.3 million metric tonnes in 2020.
The tensions, according to JPMorgan, may lead to a "substantial jump" in oil prices, with a rise to $150 a barrel reducing global GDP growth to only 0.9 per cent annualized in the first half of the year and more than doubling inflation to 7.2 per cent.