Jiří Filip Press Release: The worst possible scenario - a Russian invasion of Ukraine - is coming true. We condemn this aggression and in this paper we try to analyze the economic consequences and the impact on the financial markets.
The price of oil exceeded $100 per barrel
Russia is a key player in the energy commodity market. It is especially important for Europe. The oil situation is a good indication of the current tension. The price exceeded the level of $100 per barrel for the first time since 2014. Russia exports about 5 million barrels of oil per day. This is approximately 5% of global demand. The European Union imports around half of this volume. If the West decided to cut off Russia from the SWIFT global payment system, Russian exports to the EU could be stopped. In the case of this scenario, we expect an increase in the price of oil by $20-30 per barrel. In our opinion, the war risk premium at the current price of oil reaches $15-20 per barrel.
Europe is the main importer of Russian oil. Source: Bloomberg, XTB Research
Rally on gold and palladium
The conflict is the main foundation of the growth of the price of gold in the financial markets. It is not the first time that gold has demonstrated its role as a safe haven in times of geopolitical conflict. The price of an ounce of gold is up 3% today and is nearing $1, just about $970 below the all-time high.
Russia is a major producer of palladium – an important metal for the automotive sector. Source: Bloomberg, XTB Research
Russia is an important producer of palladium. It is a key metal for the production of catalytic converters for the automotive sector. Palladium prices jumped nearly 8% today.
Fear means a sell-off in the markets
Global stock markets are taking their biggest hit since the start of 2020. Uncertainty is now the most important driver of global stock markets as investors do not know what will come next. The correction in Nasdaq-100 futures deepened today, exceeding 20%. Technology stocks thus found themselves in a bear market. However, a large part of this decline was caused by expectations of an acceleration in the Fed's monetary policy tightening. German DAX futures have fallen around 15% since mid-January and are trading near pre-pandemic highs.
The DE30 is trading near pre-pandemic highs. Source: xStation5
Business in Ukraine is in danger
It should come as no surprise that Russian companies and companies with heavy exposure to the Russian market took the biggest hit. Russia's main index RTS is down more than 60% from the high reached in October 2021. It briefly traded below the 2020 low today! Polymetal International is a company worth noting, with shares falling more than 30% on the London Stock Exchange as the market fears sanctions will hit the British-Russian company. Renault is also affected as Russia is the company's second largest market. Banks with heavy exposure to Russia – UniCredit and Societe Generale – are also down sharply.
Even higher inflation
From an economic point of view, the situation is clear - the military conflict will be the source of a new inflationary impulse. The prices of almost all commodities are rising, especially energy commodities. However, in the case of commodity markets, much will depend on how the conflict affects logistics. It is worth noting that global customer-supply chains have not yet recovered from the pandemic. Now another negative factor appears. According to the New York Fed index, global supply chains are the most strained in history.
Central bankers' bluff
The panic after the impact of Covid-19 was very short-lived, thanks to the huge support of central banks. However, such action is now unlikely. Because the conflict is inflationary and has a greater impact on supply and logistics than demand, inflation becomes an even bigger problem for major central banks. On the other hand, a rapid tightening of monetary policy would only intensify market turbulence. In our view, the major central banks will continue their announced policy tightening. The risk of a 50bp rate hike by the Fed in March has receded, but a 25bp rate hike looks a done deal.
What can we expect next?
The key question for global markets now is: How will the conflict escalate further? The answer to this question will be key to calming the markets. Once it is answered, the calculation of the impact of the conflict and sanctions will outweigh speculation. Subsequently, it will become clearer how much the world economy will have to adapt to the new order.
