Economists and market watchers reacted to the momentous developments taking place in Ukraine, now under military attack.

Russian military forces invaded Ukraine yesterday, with attacks on cities reported across the country, plunging Europe into arguably its worst crisis since the conflict in former Yugoslavia in the 1990s and perhaps since the Second World War. Equity markets in Asia fell, US stock futures took a slide while “safe-haven” assets such as gold rose. Oil prices continued to climb.

World leaders condemned the move with the noted exception, at the point of writing, of mainland China.

The blow to confidence comes at a time when globalisation – a term covering the expansion of trade, human interaction and travel since the end of the Cold War – had already been in partial retreat because of the pandemic, US-China tariffs, and political backlashes against the supposed inequities of market economics. The Russian invasion, however, is likely to increase the pace of the world breaking into trading blocs. 

The crisis also raises question marks about Western countries’ energy policies. Germany is already reportedly reconsidering its decision to shut down nuclear power because it is now a large user of Russian natural gas. Opposition to domestic fracking in the UK – to go after oil and gas – could be overcome, and the UK may also ramp up nuclear energy, although such investment takes time. Rising inflation will hit living standards. On the other side of the ledger, oil producers in the Middle East and Indonesia, for example, will see their revenues surge, adding to the wealth of the MENA region.

Investment confidence, which started under a cloud in January, was actually improving earlier in February before the Ukraine situation deteriorated. The Global Investor Confidence Index, produced by State Street, rose to 103.9, up 13.9 points from January’s revised reading of 90.0. The increase was led by a jump in North America and a rise in Europe, although it fell slightly in Asia. (That index tracks the actual buying and selling conduct of investors.)

At UBS, the banking group argues that the limit on what Russian president Vladimir Putin will do is his “own assessment of the costs of a wider campaign in terms of resources, Ukrainian resistance, and political support at home in the event of wider conflict.” 

“Ultimately, we also think that Putin has a strong interest in continuing to sell energy and other commodities to Europe, which speaks against a long-lasting military engagement. The risk case is that the crisis remains a source of continued volatility for an extended period until a new point of stalemate is reached,” UBS continued. “In the extreme risk case, which we would define as one that has a lasting and material negative impact on global growth, the conflict escalates to a level that pushes Western nations to accept disruption to Russia's energy flow. If oil prices were to rise to $125/bbl or higher for two quarters, it would result in roughly half a percentage point lower in global GDP growth, and higher inflation affecting consumer spending power. Should Russia’s energy flow be disrupted, higher risk premiums and lower global earnings estimates would likely trigger more long-lasting losses for equity markets,” it said. 

The bank, one of the world’s largest wealth managers, added that historically, “the greatest risk for investors from geopolitical crises has come from overreacting and under-diversifying.”

In a spin
Stocks tumbled, with Dow Jones Industrial Average falling about 2.1 per cent; the S&P 500 Index down by 1.2 per cent, and the FTSE 100 index down by 3.9 per cent. Japan's Nikkei was down about 1.81 per cent. Gold futures, a classic safe-haven barometer, were at $1,926; West Texas Intermediate was up at $96.69 per barrel.

"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 per cent of the Emerging Market Debt hard currency index," William Davies, global Chief Investment Officer at Columbia Threadneedle Investments, said. "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."

Credit Suisse said: "For the time being, we keep our current allocations, including a neutral allocation to equities. Moreover, we believe investors should still seek ways to provide portfolio diversification also with respect to this geopolitical crisis and the potential impact on other economies."
 

Recession risks rise
Stefan Kreuzkamp, chief investment officer at DWS, said the risks of a recession in Europe have increased, prompting it to change its strategic outlook.

"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)," he said.

“The Russian invasion of Ukraine will decimate global stock markets. Unsurprisingly, investors stampeded into safe-haven assets, with bond yields collapsing and precious metals, such as gold and silver, soaring,” Antonia Medlicott, finance editor at the financial comparison website, InvestingReviews.co.uk, said in a note. 

“It’s no overstatement to say Europe has just entered its most dangerous period since WW2. Market volatility will be extreme in the short term. The people of Ukraine are rightly front of mind and the call to arms is something few thought they would see in their lifetime. For people globally, it’s hard to compute what they are seeing on their TV screens. Putin has crossed the Rubicon,” she said. 

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown, said of the news: “Moscow’s bullying tactics have turned into a full scale assault, with Ukraine’s worst fears materialised as Russian forces have begun a major attack on the country. This is a devastating turn of events for citizens in Ukraine who had waited in vain for a diplomatic resolution. Already the invasion has caused shockwaves across the world’s financial markets as cities in Ukraine have come under fire.” 

She noted that the UK’s bellwether stock market index, the FTSE 100 of large-cap stocks, fell  2.6 per cent on the open, and France’s CAC 40 and Germany’s DAX fell 4 per cent, following Asian markets deep into the red.

“The threat of war had already been hanging over investors, and the shock of the invasion sent the price of oil hurtling up by more than 7 per cent way above $100 a barrel, reaching more [than] $103 before falling back a notch. Oil and gas prices are likely to stay highly elevated with hard hitting sanctions set to be imposed by the international community. Market volatility has increased since the beginning of the year, stoked by rising interest rates, and today’s news has added fuel to the market turbulence,” Streeter said.