The current global market situation is “very fluid” with Russia’s invasion of Ukraine “set to keep driving the near-term outlook for financial markets”, note Bank of Singapore’s research analyst Oleksiy Shkolnyk and chief economist Mansoor Mohi-uddin in a Feb 25 report.
The invasion, which is the largest threat to Europe’s sovereign order since the end of the Cold War, has caused major volatility overnight.
Oil prices surged above US$100 ($135.35) to US$105 a barrel for the first time since 2014, amid fears of energy supplies being disrupted.
Gas prices, too, spiked, while global stock markets were “whipsawed”.
“Russian bonds, equities and the ruble plunged again. The Euro and British pound fell on concerns that the Eurozone and UK will incur an even greater energy squeeze than they are already facing over the winter,” write Shkolnyk and Mohi-uddin.
“In contrast, safe havens including US Treasuries, the US dollar and gold rose with the latter exceeding US$1,950 overnight before retracing,” they add.
See also: Russia resumes Ukraine grain-export deal in abrupt reversal
While volatility is likely to remain elevated in the near-term given the geopolitical uncertainty, Shkolnyk and Mohi-uddin note that safe-haven US Treasuries, the US dollar and gold are set to stay in demand for the time being.
“But the global recovery will continue if energy flows remain undisrupted, offering opportunities again for investors over time,” they write.
In their report, the Bank of Singapore analysts note that the US continues to refrain from targeting energy supplies that would “cause a greater shock to the global economy” even if it has “significantly increased” sanctions on Russia.
See also: Russian Odesa missile strike tests Ukraine grain export deal
While Russia’s largest bank has been cut off from the US financial system and from using the US dollar, the US did not impose harsh sanctions on Russia’s main bank handling foreign payments for oil and gas nor on Russia’s energy firms, note Shkolnyk and Mohi-uddin.
“The US and the European Union (EU) for now have also not acted to remove Russian banks from the international Swift messaging system that banks use globally for payments. Oil prices receded after the news,” they add.
The global recovery from the pandemic also remains resilient, say the analysts.
“Confidence has rebounded sharply from winter Omicron waves as February’s purchasing manager indices (PMIs) show,” they write.
Central banks are also likely to act cautiously when raising interest rates to curb inflation.
“Higher oil prices act as a stagflationary tax, increasing inflation but lowering consumers’ purchasing power,” say the analysts.
“The latter is likely to slow growth in the near-term and thus reduce the need for central banks to increase interest rates aggressively by 50 basis point (bps) hikes rather than 25bps rises,” they add.
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Stefan Kreuzkamp, chief investment officer at DWS says he expects markets to remain volatile for “some more days” until there is clarity on the situation, namely on the scope of Western sanctions and whether Putin will stop at the Ukrainian border or proceed to other post-Soviet states.
“Central banks will reconsider their policy and remain flexible. The risks of a recession in Europe have increased, thus our strategic forecasts are under review,” he writes in a statement on Feb 25.
“Already now, we believe that Europe has to prepare for a bigger influx of refugees. In the absence of any meaningful de-escalation, Europe might also have to prepare for unprecedented cyber-attacks from Russia,” he adds.
However, the biggest impact on Europe might come from energy imports, mainly natural gas.
“A significant gas price shock, or even a cut in gas deliveries could easily lead to a recession in Europe (leave alone of higher inflation),” says Kreuzkamp.
On the consequences for the economy and markets, Kreuzkamp says now is not a good time to sell positions, based on historical experience.
“For Russia the biggest impact will be in the financial sector, including security trading. The West, most of all Europe, is most vulnerable when it comes to commodity imports. We believe that energy will carry a risk premium for a prolonged time.”
“This in turn makes central bank’s reaction more difficult to predict. While they will be tempted to stimulate the economy if needed, or at least not tighten financial conditions too fast, they might be confronted with potentially higher inflation rates for a longer period than anticipated,” he says.
For equities, safe havens such as US equities, the Japanese and Swiss markets, the healthcare sector, consumer staples, as well as oil sensitives are likely to “outperform” while cyclical sectors and Europe ex-UK are “likely to face a more difficult environment."
Photo: Bloomberg
