The week was marked by Moscow’s decision to launch a “special operation” to invade Ukraine, which resulted in a still limited impact on the global stock market, with the stock market down 0.6%. global index from financial advisory firm MSCI.
After successive daily declines, accumulating a loss of 3%, the markets reacted higher on Friday, with the world index up 2.4%, more than offsetting the shock of the return of the war on the Eastern European border. The CRB global index of major commodity futures, provided by Refinitiv, rose just 0.3% during the week. The global shock continues in the cemetery.
Investors, analysts say, are also weighing the extent to which the Kremlin’s further expansion on its western border (after the 2008 operations in Georgia and the annexation of Crimea in 2014) could cause a global shock to financial markets due to the course of the occupation of Ukraine and the effect of the economic and financial sanctions proposed mainly by the United States and the European Union. The assessment of the effects of this first week is asymmetrical.
The shock on the financial markets was centered on the collapse of the stock exchanges of Kiev (41%), in the invaded country, and of Moscow (33%), in the aggressor country, and involved the neighboring places of Kazakhstan ( 22%), Slovenia (15%). Hungary (13%), Vienna (11%) and Warsaw (11%). In Moscow, seven of the main listed companies collapsed by more than 40%, including banks sanctioned by the United States and Brussels, the public companies VTB and Sberbank (60% owned by the Central Bank of Russia), the company oil company Rosneft (not yet sanctioned), real estate group PIK and internet and social media companies VK and Yandex (also listed on Nasdaq, where it fell 59%) and gold mining group Petropavlovsk (also listed in London, where he lost 41%).
Meanwhile, the heads of former European politicians who held leadership positions in Russian groups, who resigned after the invasion, turned heads: former prime ministers Matteo Renzi of Italy, Esko Aho , from Finland, François Filon, from France, and Christian Kerne from Austria. The most striking case is that of former German chancellor Gerhard Schroeder, who criticized the invasion but did not resign as head of Rosneft and the administration of Gazprom.
Secondary impacts in Asia and Europe
A second ring of negative impact encompassed Turkey (the BIST 100 index fell 4% during the week) and the Asia region as a whole, with more notable declines in the global financial market in Hong Kong ( the Hang Seng index fell by more than 6% week) and on the stock exchanges of India and Pakistan. In the Asian region as a whole, the respective MSCI index lost 3.8% during the week, almost double the drop for European stock markets as a whole (2%).
The Eurostoxx 50 index – of the 50 main listed companies in the euro zone – fell by 2.5%. Two of the European listed companies with the most exposure to Russia, Dutch Prosus (which has invested in Russian VK and is the international division of the internet assets of South African multinational Naspers) and German BASF lost more than 10% . In Lisbon, the PSI 20 fell by 2% during the week, in line with the European set.
Still relatively far from the shock wave, New York stocks remained above the fold, with an overall gain of 0.9% during the week. The technology Nasdaq stood out with a rise of 1%, but the Dow Jones, of the top thirty listed in the world, fell slightly.
The impact of geopolitics is not linear, according to history
The return of war to Europe’s borders has no linear impact on the financial markets. The most studied case covers the phase immediately before World War II and its development, particularly after Hitler launched the German expansion plan. The operation began with the annexation of Austria in March 1938 and then with the invasion of part of Poland in September 1939. During this period, the Dow Jones in New York still recorded gains in 1938 (28% ) and did not begin to collapse until 1939. (down 2.9%), while in Frankfurt the DAX composite index (started in 1933) entered a rally of gains in 1939, in what has become German stock market euphoria around the blitzkrieg Nazi, and did not stop until 1941, registering a cumulative increase of 60%. Then it stagnated, especially after the Nazi defeat at the Battle of Stalingrad, until the stock market closed in August 1944. Hitler did not commit suicide until April 1945.
In New York, the Dow Jones began to experience heavy losses only in 1940 (13% decline) and 1941 (15% loss) until it bottomed out in May 1942, beginning a bullish cycle after the North’s victory. of Midway against the Japanese in the Pacific. In London, the index lost 37% between the second quarter of 1937 (when the Japanese advanced with the global invasion of China where England had relevant economic and financial positions, especially in Shanghai) and the third quarter of 1940, after the Royal Air Force claimed superiority over German raids on England. The cycle of climbs in London began in the late 1940s and would last until 1961.
Commodity shock exacerbates inflation risk
Although the rise in the overall CRB index was modest during the week, some commodities saw price increases of more than 3% in just five sessions: gasoline and diesel and, in agricultural products, wheat and rice. Russia and Ukraine produce 30% of the world’s wheat.
The nervousness of the energy market was reflected in particular by the rise in the price of a barrel of Brent, the European benchmark, up to a high of $105.8 on the day of the invasion, an eight-year high, having closed at $94.5, up 1% from the previous week’s close. Investors have now turned their attention to the meeting of the OPEC cartel on March 2 and the broader group, called OPEC+, which includes Russia.
Commodities have already risen 14% since the start of the year, after soaring nearly 39% last year. At the same time, analysts point out that ocean freight prices will rise again and that disruptions to global supply chains will continue, now exacerbated by problems with natural gas and some agricultural products.
The impact on output and consumer price inflation will continue, putting pressure on central banks to keep tightening monetary policy amid another war in Europe threatening to derail the recovery economic after the 2020 crisis. The year 2021 rose to 4.4%, more than 1 percentage point above the previous year. Analyst expectations focus on the upcoming macroeconomic forecasts from the European Central Bank (ECB) on March 10 and the US Federal Reserve six days later. The International Monetary Fund (IMF) is moving forward with new forecasts at the April 18-24 general assembly.
However, there are a number of other central bank meetings in March that will be scrutinized by investors: Reserve Bank of Australia on the 1st, Canada on the 2nd, Bank of England on the 17th, Bank of Japan and Russia on the 18th.
Public debt interest continues to rise
The public debt market has deteriorated this week, starting with the main players involved in the war.
In Russia, short-term rates increased, being higher than medium- and long-term rates. At 6 months, interest rates reached almost 18%, while at the benchmark 10 years, they fell from 9.75% the week before the invasion to 12.1% at the close on Friday. . Forecasts point to 19% in December. In Ukraine, the 12-month rate more than doubled in five sessions: from 13% to 29%.
Insurance against the risk of bankruptcy – technically called credit default swaps – in Russia, they increased by 100 basis points (1 percentage point) between Monday and Friday, being the highest in the world after Turkey.
Ukraine operates on the basis of authorized financial assistance from the IMF in the amount of 5.3 billion dollars (4.7 billion euros), of which a tranche of 2 billion dollars (1.8 billion euros still to be disbursed). The Ukrainian president this week asked for emergency aid from the Fund and Kristalina Georgieva, the Bulgarian boss of the IMF, promised to “support Ukraine in all possible ways”. Kyiv has nearly $11 billion (about 10 billion euros) in repayments to the IMF by 2026. Ukraine’s central bank has a meeting scheduled for March 3.
The euro zone, protected by the umbrella of the ECB, recorded slight rate increases. In the case of Portuguese 10-year Treasury bonds, interest rates fell from 1.09% on February 18 to 1.1% at Friday’s close. In the case of German bonds, which serve as a benchmark, the rise rose from 0.2% to 0.22% over the same period. However, since the end of January, the spread (differential) between Portuguese and German long-term debt rose from 61 to 88 basis points (from just over six to nearly nine tenths). Spain continues to have costs and spreads superior to the Portuguese. The Eastern economies, excluding the euro, record interest rates of between 3% (Czechia) and 5.9% (Romania).
Russia’s assets are worth 90% of GDP
To cope with the impact on the Russian economy of the invasion of Ukraine and the sanctions, Moscow has 630 billion dollars (558 billion euros, as of January 31) in foreign exchange and gold reserves. They have increased by almost 40 billion dollars (more than 35 billion euros) over the last twelve months, underlines the Express Daniel Treisman, specialist in the Russian economy, professor at the University of California at Los Angeles
The author of “The New Autocracy” and director of the Russia Political Insight project also mentions other buffers, such as the Russian Sovereign Fund, which has 185 billion dollars (164 billion euros) and the assets of the Central Bank , valued at around US$647 billion (€574 billion). Brussels admits to freezing transfers from the Russian central bank.
In total, the sum of these assets amounts to almost 1.5 billion US dollars, or 91% of Russian GDP last year.
The Central Bank of Russia, which made seven key rate hikes in 2021, has not yet decided on monetary policy changes in 2022. The key rate stands at 8.5%, after having increased by 4, 25 percentage points last year. The bank meets on March 18.