- Traders still focus squarely on the Ukraine crisis
- European stocks fall as sentiment remains weak
- Bond markets cut interest rate hike expectations
- Oil jumps back above $100 a barrel
- The ruble is stable but the foreign exchange market is now divided into two parts
LONDON (Reuters) – European stocks tumbled, oil soared above $100 a barrel, and there was a scramble for US and German government bonds on Tuesday as markets grappled with massive uncertainty stemming from Russia’s invasion of Ukraine.
Russian stock markets remained suspended and some bond trading platforms no longer display prices, but overnight dealings in major financial centers in both Europe and Asia were orderly, albeit tense.
Pan-European losses STOXX 600 (.stoxx) The index rose again, with the index down nearly 2% in the middle of the session and Wall Street was expected to open between 0.5% and 1% lower.
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There were gains in the beginning for mining (.SXPP) oil and gas (.sxep) Stocks in Europe, but even those soured, and a massive 4% drop in bank stocks showed that investors now feel that interest rate hikes may now be delayed or at least reduced.
That sense saw US 10-year Treasury yields, a key driver of global borrowing costs, drop sharply to five-week lows. Astonishingly, Germany’s 10-year equivalent bond yield was headed for its biggest one-day drop since 2011.
“Assuming there is no quick resolution to this conflict, we fear global GDP will fall by 0.5%-1.0%,” said Paul Jackson, global head of asset allocation research, Invesco.
“That’s enough to exacerbate the ongoing slowdown but not enough to trigger a recession,” though he cautioned that some parts of Europe could see a recession and that inflation is also likely to stay higher for longer.
High-level talks between Kyiv and Moscow ended, on Monday, without agreement except to continue talking, and nerves were tense as a huge Russian column of armor was crushed on Kyiv on Tuesday after the deadly bombing of civilian areas in Kharkiv, Ukraine’s second largest city. Read more
With Russia one of the world’s largest oil producers, Brent crude futures rose $5.15, or 5.3%, to $103.12 a barrel. That was just below a seven-year high of $105.79 after Moscow launched its attack on Ukraine last week.
Natural gas prices in Europe jumped about 15% as well. Oil and gas prices are now up nearly 60% since fears of an invasion of Ukraine began mounting in November.
“The fragile situation in Ukraine and financial and energy sanctions against Russia will exacerbate the energy crisis and oil well above $100 a barrel in the near term and even higher if the conflict escalates further,” Louise Dixon, senior oil market analyst at Rystad Energy, wrote in a note.
Concerns that war and rising energy prices could slow the global economy mean that investors are now wondering how far and fast the likes of the US Federal Reserve are likely to raise interest rates in the coming months.
Yields on the benchmark 10-year US Treasury are down near 1.7% as US trading gains momentum from below 2% two weeks ago, while those German bonds are back in negative territory and the euro is down 0.5% as bets on a withered European Central Bank lift This year.
PMI data for February showed that momentum in manufacturing growth in the euro zone actually waned slightly last month, although it remained relatively strong and companies said supply chain constraints had eased.
“It appears that the markets are beginning to reassess the monetary policy outlook,” said Jan von Gerrich, chief strategist at Nordea.
The Russian ruble appeared to be stabilizing somewhat after dropping as much as 30% to a record low of 120 per dollar after Western countries imposed on Russia the largest far-reaching sanctions ever imposed on such an interconnected global economy.
Those measures include isolating major Russian banks from the international financial network SWIFT and sanctioning its central bank in a bid to limit Moscow’s ability to deploy its $630 billion in foreign reserves.
Russia responded on Tuesday by temporarily stopping foreign investors from selling Russian assets to ensure they made an “informed decision,” Prime Minister Mikhail Mishustin said. A source close to the government told Reuters that Russia’s huge sovereign wealth fund will also come under pressure, as it will spend up to 1 trillion rubles ($10.3 billion) to buy shares in Russian companies. Read more
Although the sanctions mean that major global banks are now reluctant to trade with Russian banks and vice versa, which means that there are now two different markets for the ruble currency – one in Russia and one internationally.
Traders in London were quoting the ruble between 101 and 105 to the dollar, although it was around 94 to the dollar according to some local market rates.
More broadly, currency market volatility is at its highest level since late 2020, according to the Deutsche Bank Index (.dbcvix) The ruble is down nearly 30% from its best level this year.
“Today, the focus will be on whether sanctions / retaliation will begin to affect commodity flows from Russia, and whether (the Central Bank of Russia) will intervene with further measures to support the ruble,” ING FX analysts wrote in a note to clients.
Trading in Russian stocks remained suspended on the Moscow Stock Exchange and the prices of Russian sovereign and corporate bonds did not appear on some trading platforms. JPMorgan’s widely tracked GBI-EM Global Diversified Index still includes Russian ruble-denominated bonds even though Monday’s market slide has reduced the so-called weighting in the index.
Foreign investors owned $20 billion in Russian government debt denominated in dollars and rubles at the end of last year, according to Russian Central Bank data, while they owned just over $85 billion in shares, according to the Moscow Stock Exchange.
“A lot of (global) price movements are a function of uncertainty.” Madison Faller of JPMorgan Private Bank.
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Additional reporting by Sujata Rao in London. Editing by Chizuo Nomiyama and Bernadette Bohm
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