(Cover Source Image: Patrick Weissenberger)
Global stock markets fell as the conflict in Ukraine intensified and investors took shelter in safe-haven assets, including government bonds and precious metals. The prospect of more sanctions on resource-rich Russia also pushed commodity prices to multi-year highs.
International markets closest to Russia were again hit hardest and the Euro Stoxx 50 and FTSE 100 suffered their worst week since the start of the pandemic, declining 10.5% and 6.7% respectively. In the US, the blue-chip S&P 500 fell 4.0%.
Few sectors have been spared from the sell-off and those most exposed are banks and car manufacturers. European banks, led by those in Italy, France and Austria, have more than $90 billion of exposure to Russia counterparties and have declined almost 30% year-to-date. Renault, which majority owns AvtoVaz, the Soviet-era maker of Ladas, has fallen by a similar amount.
Sanctions have crushed the value of Russian assets and the Moscow Stock Exchange has remained shut since the start of the conflict. The value of many London-listed shares of Russian companies were virtually wiped out before the London Stock Exchange suspended trading in 27 companies. Depositary receipts for Sberbank, the country’s largest bank, and Gazprom are valued at close to zero.
The Central Bank of Russia more than doubled interest rates from 9.5% to 20% last Monday in a bid to halt the rout of its currency but with little success. The Ruble to US Dollar exchange rate has collapsed to around 155 with the central bank cut off from accessing the vast majority of its $640 billion of reserves. The fallout has extended to the currencies of neighbouring countries, including the Hungarian Forint and Polish Zloty which also fell to record lows.
Russia’s credit rating has been cut to ‘junk’ status and its largest US dollar denominated bond, which is due to mature in 2047, has fallen to 20% of face value, suggesting its first default since 1998 is inevitable. President Putin signed a decree at the weekend allowing the government to repay foreign currency denominated securities in rubles. It will be tested next week when interest payments of $117 million are due on its US dollar bonds.
Brent crude briefly surged to a near 14-year high of $139 a barrel after US Secretary of State Anthony Blinken warned NATO allies were actively discussing a ban on importing Russian oil. Wholesale natural gas prices in Europe also jumped to a record high €345 per megawatt hour, up from around €16 a year ago. Europe imports a third of its oil and more than 40% of its gas from Russia.
Other commodities are also soaring on supply concerns. The price of Nickel on the London Metal Exchange rose 66% on Monday, at one point breaking above $100,000 a ton amid a short squeeze, and palladium, used in catalytic converters, hit a new all-time high. Russia accounted for 40% of global mine production of palladium last year.
Russia and Ukraine are two of the world’s largest exporters of wheat and its price on the Chicago Futures Exchange jumped to a record high of $14.25, more than 60% higher since the start of the invasion.
The sharp spike higher in prices will have a big impact on the cost of living. Inflation expectations in the US and Europe, as measured by 5-year breakeven rates, have risen to 3.4% and 3.1% respectively.
Cryptocurrencies gained at the outset of the conflict on warnings that they would be used to skirt sanctions on Russia and capital controls. However, the founder of Binance played down these claims, asserting “crypto is too small for Russia”. Changpeng Zhao added blockchain technology is too traceable for illicit activities.