RUSSIA- UKRAINE WAR CONFLICT AND ITS IMPACT ON THE FINANCIAL MARKETS

RUSSIA- UKRAINE WAR CONFLICT AND ITS IMPACT ON THE FINANCIAL MARKETS

• CURRENT RUSSIA- UKRAINE WAR CONFLICT STARTED ON FEBRUARY 24, 2022: President Vladimir Putin announced an attack on Ukraine on February 24, 2022, days after he recognized two breakaway regions (Donetsk and Lugansk) of Ukraine as independent. First, Russia troops moved closer to Ukraine’s capital Kyiv, but later they moved to the Donbas region (eastern Ukraine) and southern parts of Ukraine. The war has entered its four month, and according to many analysts, it will remain in place within the next several months.

• MARKET REACTION (THE FIRST SHOCK FROM FEBRUARY 24 TO MARCH 8): RETROSPECTIVE
  
  COMMODITY MARKETS: Most commodities rose in value as Russia appeared one major commodity exporter

  1. CRUDE OIL (rose 39.50% from February 24 to March 8: from $92.77 to $129.41): Russia is among the three largest oil producers of oil in the world (along with Saudi Arabia and the USA). Russia used to produce around 11 million barrels of oil before the war and export a little over 5 million barrels a day of oil. Crude oil rose around 40% days after the war started reaching its highest rate since 2008 on March 6, 2022 ($130.52). Russia used to send over 40% of its oil exports to Europe, which, on the other hand, would cover 25% of Europe’s oil needs. Meanwhile, the EU came up with a package of sanctions which included oil bans from Europe. The package suggested that the European Union would ban 90% of Russia’s oil imports by the early 2023, sparking fears over potential supply/demand disruptions. To this end, major investment banks in the US expect oil prices to continue to rise. Among them, Goldman Sachs increased Q3 estimate to $140 a barrel, up from previous $125. Morgan Stanley Q3 forecast stands at $130. But their bull case forecasts $150. JPMorgan said oil prices can go to $175 and beyond by year end.

  2. US NATURAL GAS (rose 12% from February 24 to March 8: from $4.620 to $5.178): Russia is one of the largest natural gas producers and exporters in the world. The European Union used to get 45% of its natural gas needs from Russia. As the EU started to make plans to reduce Russia’s natural gas imports they turned to the US Natural Gas.

  3. GOLD (rose 8.36% from February 24 to March 8: from $1910.38 to $2070.06): Gold has been considered a safe- haven instrument, which attract investors in times of distress such as war conflicts. Investors ran for safety with the Russia- Ukraine conflict, sending gold prices up by 9% 13 days after to war, to almost a fresh all time high of $2070 per ounce.

  4. PALLADIUM (rose 37.50% from February 24 to March 8: from $2479.75 to $3,409): Russia is the largest Palladium producer in the world, covering around 45% of the global supply. Palladium rose 37.50% to a fresh all- time high of $3,409 per ounce 13 days after the war started.

  5. WHEAT (rose 55.14% from February 24 to March 8: from 874.37 to 1356.50): Russia is the largest wheat exporter in the world and together with Ukraine make up around 30% of the total world’s exports. Wheat prices jumped by 55.14% as fears over wheat (food) shortages abounded.

STOCK MARKETS: The global stock market fell as investors believed the war would push the global economy into recession. Major global stock indices that have fallen:

1. USA500 (fell 1.85% from February 24 to March 8: from 4217 to 4139.08)

2. USA100 (fell 2.94% from February 24 to March 8: from 13500 to 13103)

3. USA30 (fell 2.26% from February 24 to March 8: from 33056 to 32308)

4. GER40 (fell 14.30% from February 24 to March 8: from 14503 to 12423)

5. UK100 (fell 9.21% from February 24 to March 8: from 7428 to 6744)

6. JPN250 (fell 7.4% from February 24 to March 8: from 26230 to 24280)

7. CHINA50 (fell 12.47% from February 24 to March 8: from 14855 to 13002)
   
   CURRENCY MARKETS: The safe- haven US Dollar has dominated the currency markets across the war time. The US Dollar Index had risen around 3.40% from February 24 to March 8 from 96.143 to 99.415. The EURO currency, which is heavily impacted by the war due to the EU being reliant on Russia’s energy products, was among the worst performers since the start of the war.
   
   EUR/USD (fell 4.41% from February 24 to March 8: from 1.13039 to 1.08045)
   
   GBP/USD (fell 3.41% from February 24 to March 8: from 1.35432 to 1.30802)
   
   USD/JPY (rose 0.80% from February 24 to March 8: from 114.885 to 115.777)
   
   COMMODITY CURRENCIES: Currencies whose economies are tied to the commodity markets may rise in value driven up by rising commodity prices due to the ongoing Russia- Ukraine war conflict.
   
   Canadian Dollar: The Canadian currency is one of them as Canada is one large oil exporter. As oil prices go up, the Canadian economy increases in value, strengthening its domestic currency.
   
   Australian Dollar: The Australian currency is also supported by the commodity markets as Australia is one of the largest exporters of iron ore and copper. The rising based- metal prices tend to support the Australian currency.
   
   *Please note that past performance does not guarantee future results
   
   CONCLUSION: It is noteworthy, though, that the global markets do not solely depend on the Russia- Ukraine war conflict, but it is fair stating that the war is one of the greatest factors. It is also fair stating, assuming that other factors remained unchanged, the global markets would move on the Russia- Ukraine war developments. To this end, it can be developed a couple of scenarios:

   • SCENARIO I: The war escalates into the months ahead and spreads across all Ukraine. More sanctions could be imposed on Russia. This scenario could see higher commodity prices, lower stock prices and stronger US dollar.

   • SCENARIO II: The war spreads beyond Ukraine (Lithuania bans transit of goods from Russia to Kaliningrad, while Sweden and Finland want to join NATO against Russia’s will). Russia could seek to retaliate, and this could create a direct conflict between NATO and Russia. This scenario could see again higher commodity prices, lower stock prices and stronger US Dollar currency.

   • SCENARIO III: The war de- escalates and Russia and Ukraine reach a peace. This scenario might see lower commodity prices, higher stock prices and lower US dollar currency.