A potential invasion of Ukraine by neighboring Russia would be felt across a number of markets, from wheat and energy prices and the region’s sovereign dollar bonds to safe-haven assets and stock markets.
A major risk event usually sees investors rushing back to bonds, generally seen as the safest assets, and this time may not be different, even if a Russian invasion of Ukraine risks further fanning oil prices — and therefore inflation.
Inflation at multi-decade highs and impending interest rate rises have made for a tetchy start to the year for bond markets, with U.S. 10-year rates still hovering close to the key 2% level and German 10-year yields above 0% for the first time since 2019.
But an outright Russia-Ukraine conflict could change that.
More pain at the pump
Oil prices have jumped in recent weeks to levels unseen since 2014 in part because an invasion of Ukraine could derail the Russian energy supply.
Russia is an energy superpower, producing 9.7 million barrels per day last year, according to Rystad Energy. That is second only to the United States and amounts to more oil than Iraq and Canada produced — combined.
Market turbulence
Investors have been glued to the latest developments on the Russia-Ukraine crisis.
Signs of escalation have spooked markets, while comments suggesting war might be averted have set off relief rallies.
Investors famously detest uncertainty. It’s easy to see how a full-blown invasion of Ukraine would trigger a knee-jerk selloff in stocks as investors confront the possibility of an oil shock, higher inflation, and a confusing sanctions regime.
Dow suffers worst day of 2022 on Russia-Ukraine tensions
Stocks suffered steep declines Thursday as traders fretted over Ukraine-Russia tensions.
The Dow Jones Industrial Average fell more than 600 points, or 1.8%, for its worst one-day decline of 2022. The S&P 500 slid 2.1%, and the Nasdaq Composite dropped 2.9%.
Traders broadly dumped riskier assets, such as stocks, in favor of traditional safe havens like bonds and gold.
The 10-year Treasury note yield dropped more than 8 basis points to 1.96% (yields move inversely to prices). Gold futures, meanwhile, jumped to their highest level since June.
Energy as a weapon
Russia is one of the world’s largest energy-producing countries, exporting about 5 million barrels of oil a day. Russia also has provided Europe with about a third of its natural gas, and the U.S. has long objected to Europe’s reliance on Russia’s energy resources for security reasons.
“A rising food price puts governments under pressure. Russia is a big player in the quality of life commodity market,” RBC’s Croft said. “They already reduced [gas] flows out of Ukraine.”
Russian gas flows into Europe through a Nord Stream I pipeline but also pipelines going through Ukraine. Croft said if Ukraine were involved in a conventional war, energy flows would be halted and there would be concerns of infrastructure damage.
Oil prices dip as traders watch Russia-Ukraine crisis, Iran nuclear talks
Oil prices settled lower on Thursday, putting crude on track for its first negative week in nine.
Tensions between Russia and Ukraine have been driving prices, but traders attributed Thursday’s move to progress on the Iran nuclear talks. A deal could bring more than 1 million additional barrels per day to the global market.
“The Iranian wildcard and Ukraine stand-off are likely to come to a head in the next few days, the outcomes of which will determine whether or not higher energy prices are here to stay,” said Stephen Brennock, oil analyst at PVM Oil Associates.
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