Equities tumble on Russia-Ukraine woes
The prospect of Russia invading Ukraine is hammering European equity markets. Tensions have been running high in the past few days as governments around the world have been advising their citizens to leave Ukraine, which speaks to the threat of war. Some of the fears surrounding the tense political stand off have disappeared as Sergei Lavrov, Russia’s Foreign Minister, urged President Putin to continue talks with Western governments. As far as the markets are concerned, the atmosphere is still tense. The DAX is very sensitive to the goings on in Eastern Europe as the German economy is heavily dependent on natural gas from Russia, so a conflict on the edge of the EU could cause major problems for the strongest economy in Europe. The CAC and the FTSE MIB are also enduring large losses because the eurozone economy is tightly inter-connected. Continental indices are down on average 2.5%. In the London, the FTSE 100 is being dragged lower by the broad bearish sentiment. Oil and banking stocks are some of the largest decliners. On Wall Street, the mood is nowhere near as bad as the S&P 500 is down 0.45%.
The US dollar is still experiencing high levels of volatility following last week’s inflation report where CPI increased from 7% to 7.5% - a new 40 year high. Today, James Bullard of the Federal Reserve, reiterated his view that interest rates should be hiked by 1% between now and July. Last week, Mr Bullard sent the markets into a tailspin by announcing such a hawkish update, but today’s market reaction was a little more measured. At the last European Central Bank meeting, the back didn’t rule out the possibility of lifting interest rates this year, but considering the rumblings in regards to Russia-Ukraine, it will be difficult to imagine the ECB even contemplating hiking rates in the current political environment. To a certain degree, the US dollar is rallying due to the flight-to-quality play as the currency is geographically distanced from the potential warzone. On the other hand, the euro is possibly in the firing line, and it is down versus the dollar, the Swiss franc and sterling.
Gold hit a three-month high as dealers are dumping stocks and diverting their cash to assets that are lower risk. The fact the yellow metal is rising in the face of a firmer dollar underlines the high level of demand for the asset. WTI and Brent crude are at elevated levels due to the political wranglings in Eastern Europe.
