Russia attacks Ukraine; investors flee to safe havens

The Russian President Vladimir Putin has ordered a full-scale invasion of Ukraine earlier today, moving troops and bombing several military targets across the country. According to Moscow, the move aims to demilitarize Ukraine, blaming the US and its allies for breaching a ‘red line’ by trying to further expand NATO eastwards in an attempt to pressure and blackmail Russia. Western powers have condemned the military assault, vowing to impose harsh economic sanctions.

As expected, investors fled to the safety of the Japanese yen, with the US dollar also posing as a safe haven currency. Moreover, gold and US treasuries soared due to the risk-off sentiment, with the 10-year benchmark yield falling below 1.88%. On the contrary, the euro and commodity-linked currencies have suffered the most against the greenback. Likewise, the ruble has tumbled to a record low against the US dollar, with the Russian central bank looking ready to start foreign exchange interventions to stabilize its currency.

On the data front, the second estimate for the fourth quarter preliminary GDP in the US came out in line with expectations at 7%, inching higher against the previous reading of 6.9%, reflecting the current strong stance of the US economy. Also, initial jobless claims cloaked in at 232k versus the estimate of 235k, staying consistent with a strong employment market.

Supply fears propel commodity prices higher

The prospect of harsh economic sanctions against Russia increased fears amongst investors that the Kremlin could weaponize its oil and gas exports, which accounts for over 40% of the European Union’s energy imports. Natural gas futures soared in the aftermath of the invasion, while WTI crude also skyrocketed, flirting with $100 per barrel.

Russia is also a major producer of aluminium and nickel, with the prices of those base metals increasing to their highest levels in almost a decade. Similarly, grain prices have also reached multi-year highs. Investors are increasingly fear that supply disruptions in commodities could further humper the global economic recovery efforts, which are already struggling with elevated price pressures and fears of aggressive monetary tightening.

Looking forward, if disruptions in energy and raw-materials supply materializes, commodity prices could increase even more, which could further fan the flames of inflation. This could prompt the Fed to take more aggressive monetary policy tightening actions, increasing the risk of choking the US economic expansion.

Stocks sink

On Wednesday, US stocks finished firmly lower amid the escalating geopolitical uncertainty. The S&P 500 was down for a fourth consecutive session shedding 1.8%, while the tech-heavy Nasdaq Composite retreated by 2.6% and is now found 18.8% below its all-time highs. The energy sector was the sole winner of yesterday’s trading session, lifted by the increase in oil prices. This trend is expected to continue in the short-term as oil prices continue their advance.

Looking ahead, further volatility is expected in the near-term as the situation unfolds. However, if history can be used as an indicator for the future, markets such as the S&P 500 tend to rebound in the months after an initial geopolitical induced shock, provided that the situation normalizes soon. In addition, the strong earnings prospects and share buyback programs recently announced by many US blue-chip names, could soon alleviate the heavy 2022 losses on various S&P 500 quality stocks.