On Thursday morning, Russia made good on their threats, waging a full-scale military invasion of Ukraine. As the world waits to see what the full effects of the conflict will be, investors wage a global sell-off of riskier assets. Markets have been wary of escalating tensions in Eastern Europe for weeks now, amid fears that a major conflict could disrupt energy flows and provoke crippling sanctions.
Key themes for this week include:
- United States (US) imposes sanctions on Russia
- Ukraine deploys martial law
- Oil Prices soar, adding to inflation fears
- Risk-off behavior sees flight to safe-haven assets
PUTIN INVADES THE UKRAINE
During the early hours of Thursday morning, Russian President, Vladimir Putin, announced on live television, that Russia will invade Ukraine, to “defend” the Donbas region of the Ukraine, all the while blaming the US for the attack, and accusing the Biden-led US government of failing to protect the Russian security interests in the region. The Russian attack, which involved sea, land and air invasions, claimed civilian lives, Russian and Ukrainian troops, and caused chaos around the city of Kyiv, home to nearly three million people, as Ukrainians scrambled for essentials, money and a way out of the city.
Ukraine President, Volodymyr Zelensky, announced martial law shortly after the attack, urging citizens to remain calm. He however made it abundantly clear that Ukraine has no intention of yielding to Russia and offered weapons to any citizen who is willing to bear arms and fight for Ukraine’s independence.
The big question from a financial markets, and global stability perspective, is what happens next? The answer to that question depends largely on how the West will retaliate, and whether that retaliation will include military action against Russia or be limited to sanctions.
Kaja Kallas, Prime Minister of the Baltic republic of Estonia, which borders Russia, said a number of North Atlantic Treaty Organisation (NATO) allies that share borders with Russia have agreed to launch consultations under NATO’s Article 4. Under the defensive alliance’s treaty, NATO can be brought together if any member fears their independence or territory is under threat.
Putin, however, claimed that Russia’s goal was not to occupy Ukraine, but merely to protect residents of eastern Ukraine from what he called a “regime” and warned other countries that any attempt to interfere with the Russian action would lead to “consequences they have never seen,” according to Reuters. NATO and its allies firmly condemned the attacks, and, in an emergency meeting, the military alliance decided to deploy additional forces and implement fresh sanctions.
With oil prices already soaring on the back of the conflict, fears that other commodities will be in short supply are also fueling inflation concerns. Ukraine is a major export contributor to maize, wheat, iron and several other key resources.
As with all geopolitical events, one can only wait and see what the eventual outcome will be, but if a cautious approach was ever a consideration, now would be the time to employ it.
DATA IN A NUTSHELL
The number of Americans filing new claims for unemployment benefits decreased to 232 000 in the week ending 19 February from a revised 248 000 in the previous period and compared with market expectations of 235 000. The four-week moving average, which removes week-to-week volatility, was 236 250, while continuing claims stood at 1.476 million, a pandemic low.
The IHS Markit Eurozone Composite Purchasing Managers Index (PMI) increased to 55.8 in February, up from 52.3 in January, beating forecasts of 52.7. The reading pointed to the strongest expansion in private sector activity in five months, as COVID-19 containment measures were relaxed. Employment accelerated for a second consecutive month, running to the highest level since November, albeit constrained by staff shortages in many cases.
The IHS Markit/CIPS United Kingdom (UK) Composite PMI jumped to 60.2 in February from 54.2 in January, beating market forecasts of 55.The reading points to the strongest growth in private sector activity in eight months, after disruptions due to the Omicron variant at the start of the year, and is being led by a strong recovery in consumer spending on travel, leisure and entertainment.
The Composite Leading Business Cycle Indicator in South Africa decreased by 0.5 % from a month earlier, reversing from an upwardly revised 1.3% rise in January. It was the first negative reading since September 2021. The largest detractors in December 2021 were decelerations in the six-month smoothed growth rate in the real M1 (liquid) money supply and in the twelve-month percentage change in the composite leading business cycle indicator for South Africa’s main trading partner countries. An acceleration in the six-month smoothed growth rate of job advertisement space contributed positively to the indicator.
EQUITIES TANKS AS TENSION ESCALATES
US stocks sank as much as 2% on Thursday, following Russia’s invasion of Ukraine. The Dow Jones declined to levels last seen in March 2021 while the S&P 500 dipped deeper into correction territory.
Meanwhile, European stocks ended sharply lower on Thursday, on the back of the invasion. The European Union (EU) joined the US and UK by announcing harsher sanctions on Russia. The DAX was among the worst performing bourses, shedding 4% to 14 052 points, the lowest level since March 2021. The STOXX 600 ended 3.2% lower, the CAC sank 4%, the FTSE MIB was down 4.2% and the IBEX 35 2.9%. The banking sector had its worst day since the Coronavirus pandemic started in 2020. Italian, Austrian and French banks are the world’s most exposed to Russia.
The MOEX Russia Index plunged as much as 45% before closing 33.3% lower at a four-year low of 2 058 points on Thursday. Western countries announced harsher sanctions are to be imposed in retaliation, while US President, Joe Biden, promised further measures to hit Russia’s economy. Financial shares, which are the most exposed to sanctions, fell over 35%, led by Sberbank which fell 48% and VTB Bank, lost 43%, prompting the Central Bank of Russia to ramp up liquidity measures with emergency interventions. State-backed energy giant, Gazprom, also plunged on the threat of sanctions, losing 40.5%.
The JSE FTSE All Share index regained some of its early losses to close 1.7% lower on Thursday, its biggest daily decline since 28 January this year, led by tech stocks and retailers. Investors sought refuge in safe-haven assets amid concerns over the impact of the mounting geopolitical tensions on inflation and global economic growth. Locally, traders continued to digest the Finance Minister, Enoch Godongwana’s budget speech, which reaffirmed the government’s commitment towards growth and fiscal sustainability. Credit rating agency Fitch Ratings, however, has warned that South Africa is not doing enough to contain its rising debt, despite better-than-expected revenue windfalls.
OIL PRICES SURGE
On Thursday, Brent crude futures hit $100 per barrel for the first time since September 2014, after Putin announced that Russia would launch a military operation in Ukraine. Meanwhile, investors are also closely monitoring the Iran nuclear talks amid signs of progress, as a potential deal could add more than one million barrels a day of supply, helping to ease supply in a tight global market.
Gold breached the $1 970 mark on Thursday, a level not seen since September 2020, as safe-haven demand for the metal jumped after the Russian invasion. Investors are also keeping an eye on accelerating inflation and ensuing rate hikes from the US Federal Reserve (Fed). Fed Board Governor, Michelle Bowman, said she would assess incoming data to decide whether a half percentage point increase at the march meeting is needed.
Chicago wheat futures surged to a nine-year high of $9.30 per bushel, as the Russian invasion of Ukraine led to expectations of wheat supply disruptions from two of the world’s largest producers. With Russia and Ukraine accounting for roughly 30% of the world’s wheat exports, conflict in the region jeopardizes crucial supply from an already tight market. Elsewhere, droughts in North America hampered US and Canadian production.
FLIGHT TO SAFETY BOLSTERS DOLLAR
The US Dollar Index appreciated past 97 on Thursday, its strongest level since June 2020 on the back of the run for safe-haven assets after the Russian invasion. Investors are also keeping an eye on accelerating inflation.
The euro lost over 1% to trade at $1.11 on Thursday, the lowest level so far this month, on the back of the invasion. Traders are also seeking further clues on the European Central Bank monetary policy, as price pressures continue to intensify in the EU.
The ruble plunged almost 10% to hit all-time low against the dollar on Thursday before regaining some ground. The Moscow Exchange has suspended trading across all markets after a big sell-off of Russian assets, but trading resumed on Thursday morning. Meanwhile, the Bank of Russia ordered brokers to suspend short selling on the Russian exchange and over-the-counter markets until further notice. The central bank also said it would begin interventions on the currency market and offer extra liquidity to the banking sector. It is the first foreign exchange intervention from the central bank since 2014, when Russia annexed Crimea.
The South African rand weakened over 2% to around R15.50/$, its lowest level since 28 January, as risk sentiment was eroded with the invasion of Ukraine. At the same time, concerns over a more hawkish Fed persist, as the ongoing conflict should not cause the Fed to delay its plans for hiking interest rates. The rand has been supported by rising prices of precious metals such as gold, which benefits the resource-rich country, along with pro-business reform pledges. The South African Reserve Bank is expected to hike its main lending rate by another 25 basis points next month, extending a tightening cycle that began in November, to anchor inflation expectations.
The rand is trading at R15.29/$ R17.16/€ and R20.54/£.