Market Update March Monday 7th 2022

Market volatility ensues as Ukraine war escalates

It was another volatile week, dominated by the ongoing conflict in Ukraine. As Russian forces slowly advanced and the bombarding of Ukrainian cities continued, markets continued to sell off, especially with Western nations imposing further sanctions on Russia. Commodity prices also soared, amidst disruption to vital commodity exports.

Financial sanctions against Russian individuals, organisations and banks were ratcheted up over the previous weekend and this week from the US, UK, and European Union. Even Switzerland has made an unprecedented move to abandon its historically neutral position in foreign affairs and agreed to sanctions against Russia. Selected Russian banks have also been removed from the international SWIFT messaging system, which enables the smooth transfer of money across borders. In addition, Western leaders have frozen the assets of Russia’s central bank, limiting its ability to access its $630bn of dollar reserves.

In response, Russian assets collapsed. The Russian Rouble plunged as much as 29% against the US dollar at the start of the week, forcing the Russian central bank to double interest rates to 20% in a bid to support the currency. Meanwhile, the main Russian index in Moscow remains shut in an attempt to halt further selling. Russian companies listed on foreign exchanges, particularly in London, had their values essentially wiped out. For example, Sberbank, Russia’s largest bank, plunged 95% on Wednesday on the London market to trade as low as a penny, with other major Russian companies such as Gazprom, Lukoil and Rosneft facing similar declines. Yesterday 27 companies with strong ties to Russia had their trading suspended on the London market.

As of 12pm on Friday, London time, US equities over the week have fallen 0.5%, whilst US technology stocks dropped 1.14%. Closer to the conflict, European stocks dropped 8.92% and UK stocks fell 6.54%. Further out in Asia, the Japanese market fell 1.67%. In Hong Kong, where Coronavirus cases and lockdowns continue, the market fell 3.8%. Australia was an outlier, rising by 1.6%, as the index is dominated by energy and commodity producers which have benefitted from the rise in oil and metals.

US Federal Reserve to push ahead with interest rate increases

Despite the economic uncertainty created by Russia’s invasion of Ukraine, Federal Reserve (Fed) Chair Jay Powell, in his testimony to Congress, insisted the central bank would raise interest rates later this month by 0.25%. Whilst commenting that the Fed would proceed with caution given the potential impact of the conflict, Powell justified his proposal citing continued employment gains over the past six months in what has been an “extremely tight” labour market. He also highlighted that consumer price inflation increases were “spreading to a broader range of goods and services”.

Safe-haven bonds rally

Bond yields, which move inversely to their bond prices, all fell significantly as investors sought the safety of core government bonds as equities declined. As of 12pm on Friday, London time, the US 10-year Treasury yield which was trading close to 2%, declined by 17 basis points to 1.78%. Equivalent 10-year German bunds are now trading with yields back in negative territory. The bond yield fell 26 basis points to trade at -0.03%. UK equivalent gilt yields also fell by a similar amount with the 10-year yield falling 18 basis points to trade at 1.28%.

Commodity prices soar to their highest level since 2008.

With the potential for further disruption to commodity supply chains from the conflict, US oil prices hit the highest level since 2008 on Thursday. West Texas Intermediate, the US oil benchmark, rose as much above $116 a barrel, before settling to $111 as of 12pm, London Time. Brent crude oil prices also rallied sharply, by 15.76% to $113 per barrel. In Europe, wholesale natural gas prices reached almost €200 per megawatt-hour while thermal coal surged beyond $400 a tonne. Although Western sanctions on Russia have directly avoided natural resources, trading partners and shipping companies have effectively boycotted Russian commodities to reduce legal and reputational risk. Gold, which investors have bought in a flight to safety, has risen 3.1% over the week.