After a sharp morning drop, the FTSE 100 closed down nearly than 3.9% on Thursday. This followed Asian markets ending the day in the red across the board after Russia launched an early morning invasion of Ukraine.
The three-pronged attack saw Russian forces enter Ukraine from the north, south and east.
Western leaders spent the day formulating their respective and collective responses to the abrupt escalation on Ukraine’s border.
Below are some market reactions from industry commentators about what they think could happen next and the implications for asset classes.
Richard Hunter, head of markets at Interactive Investor:
“The escalation of tensions arising from the Russian action has pulled the rug from markets, adding to an already brittle environment in the face of rising inflation and interest rate concerns.
“The negative baton is being passed from market to market globally, with another weak opening in the US now leaving the Dow Jones down by 11% in the year to date, the S&P500 by 13.4% and the Nasdaq by 19%. The turmoil has also sent the FTSE100 into negative territory for the first time this year, with a further leg down following Wall Street’s open, leaving the UK’s premier index down by 1.7% in 2022.
“The oil price, which has now risen by 35% in the year to date, has prompted inevitable interest in the majors, although BP’s exposure to Russia via Rosneft has been of some concern. BP nonetheless remains ahead by 13% in 2022, and Shell by 24%.
“If there is a glimmer of hope among the volatility which has become a feature of this year even without the latest developments, it is that there will have been certain sectors caught in this crossfire which will have simply been oversold. Such businesses, whose fundamentals will not have changed overnight, will potentially lead the charge as and when sentiment improves. For the moment, however, matters need to stabilise at a macro level before any sort of market recovery can be entertained. It is impossible to call the bottom in markets such as these and difficult to anticipate positive catalysts, but turmoil such as this can provide buying opportunities.
“Indeed, that particular message seems to be resonating with some of our more steely customers, whose contrarian views are resulting in some interesting buying activity.
“So far this week, among the most bought trusts is JP Morgan Russian Securities, while among individual stocks – and despite a further 29% fall today – Evraz has also featured.
“Nor is the activity focused just on the wider geopolitical implications. The further weakness of the Nasdaq market in particular has prompted another round of buying activity in Scottish Mortgage, while in the face of a mildly disappointing UK banks’ reporting season, Lloyds Banking and Barclays also feature on the top ten buying table today.
“One of the few factors that can be guaranteed in the shorter term is volatility. By the same token, investment is a marathon not a sprint and however difficult that may be to remember in this environment, it should also offer some solace to long-term investors.”
Stefan Kreuzkamp, chief investment officer at DWS:
“We expect markets to remain very volatile for some more days until there will be clarity about the scope of Western’s sanctions and a better understanding of whether Putin will stop at the Ukrainian borders 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.
“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. While these two points could already weigh on the European economy, the biggest impact might well 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).
“After a first state of shock, markets are waiting for more clarity about the scope of Western sanctions as well as possible counter measures by Russia. Market dynamics to the downside might intensify if certain risk limits would be triggered with institutional investors, or if retail investors start panicking. At the same time, historical experience tells us that such days are not a good time to sell either. 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.”
Fixed Income
“With Europe’s economy being much more dependent on energy supply from Russia, we would expect more pressure on European yields compared to the United States. For treasuries we expect a flattening at the longer end of the curve (10y to 30y). We have also become more cautious on European corporate bonds.”
Equities
“For equities as well, European assets at the core of the storm. Safe havens (US equities, Japan, Swiss market, Health Care, Consumer Staples) and oil sensitives (UK, energy sector) are likely to outperform, while cyclical sectors and Europe ex-UK are likely to face a more difficult environment.
“Eurozone financials could be hurt by delayed ECB hikes and disentanglement of relations with the Russian financial system. Investors will adapt their risk premium for single stocks depending on their direct or indirect exposure to Russia and Ukraine either as an end market or as a source of supply. Russian stocks are down by more than a third, however they represent less than 0.5% of the MSCI AC World and less than 3% of the MSCI Emerging Market.”
Erik Knutzen, chief investment officer multi-asset, Neuberger Berman:
“The Russia-Ukraine situation represents an important risk to markets at the moment; however, we believe that inflation and central bank policy responses to rising prices remain the most significant risk facing investors at the moment. This is because the global economy is faced with the challenge of a unique combination of factors driving inflation in the post-Covid environment including supply-side elements such as logistics and supply chain dislocations to labour market challenges as well as demand-side forces resulting from pent-up consumer demand and the increased liquidity in the system from unprecedented monetary and fiscal stimulus in response to the pandemic.
“In this environment, traditional central bank tools may not be entirely fit for purpose – hiking short-term rates will not increase the number of lorry drivers or the speed at which ships can be unloaded at bottlenecked ports.
“The potential for inflation to remain structurally higher in this cycle than last appears high given structural changes in the global economy including peak globalization, new labour force dynamics, and the effort to de-carbonize the global economy. At the same time, the risk of central bank policy error – either raising rates too aggressively or falling ‘behind the curve’ – are elevated.
“While the Russia-Ukraine crisis clearly generates considerable risks in its own right, it also adds an unwelcome geopolitical layer to the challenge of high inflation. We have already seen Germany suspend certification of Nord Stream 2, which will likely add to Europe’s energy price inflation.
“Additional sanctions have the potential to add to those pressures: for example, Russia provides 6% of the world’s aluminium, which is already in short supply, and it is also an important producer of precious metals such as palladium and platinum, which are critical for the transition to the net-zero economy. We consider commodities in general, and precious metals in particular, to be effective hedges against periods of high inflation paired with low or slowing growth—heightened geopolitical risk adds more support to these assets.”
William Davies, global chief investment officer at Columbia Threadneedle Investments:
“We are already seeing a risk off sentiment across emerging markets, as the possibility of imposed sanctions increases, although Russia and Ukraine together comprise around 3.5% of the emerging market debt hard currency index.
“From a credit perspective, most Russian companies are at the lower end of investment grade ratings and could be downgraded to high yield as a result of sanction risks.
“We expect to see an increase in energy prices and grain prices across emerging markets which is likely to have an impact on commodities globally.”
