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

Russian military forces invaded Ukraine today, 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.

The blow to confidence comes at a time when globalization – 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. China has – as of the time of writing – been quiet in its official pronouncements about the invasion of Ukraine. 

The crisis also raises question marks about Western countries’ energy policies. Germany is already reportedly reconsidering its decision to shut down nuclear power because that country 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 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
The news that broke during Asian and European trading hours rocked markets. European stocks tumbled, with the UK’s FTSE 100 falling 2.5 per cent, while France's CAC 40 dropped 4 per cent and Germany's DAX 30 shed 4 per cent. Russian stocks cratered – its main index fell 45 per cent. In Asia, Hong Kong's Hang Seng Index dropped 3.2 per cent, its biggest daily loss in five months. South Korea's Kospi fell 2.6 per cent. Japan's Nikkei 225 (N225) lost 1.8 per cent and China's Shanghai Composite slipped by 1.7 per cent lower. 

US stock futures fell; Dow Jones futures (source: CNN, others) fell 2 per cent and S&P 500 and Nasdaq futures were down 2 per cent and 2.5 per cent respectively. In the gold market – a classic safe haven asset – it is over $1,960 per ounce. Brent crude oil prices are more than $100 per barrel. West Texas Intermediate was trading around $99.6 (source: CNBC, New York Mercantile Exchange).

Some commentators in Europe as the news unfolded were even more blunt about the impact of Putin’s actions.

“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 materialized 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.