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24, Russian President Vladimir Putin made a speech announcing the launch of a special military operation in the Donbas region.
At the same time, it said it had no plans to occupy Ukraine. But the situation quickly escalated afterwards, with Russia blitzing key military infrastructure in Ukraine, an attack on the capital Kiev and a state of emergency throughout Ukraine.
Russia-Ukraine conflict escalates
This led to a sharp shock in global markets.
Commodities such as metals, crude oil and food surged at one point. Global stock markets fluctuated sharply, with U.S. stocks rebounding quickly after opening sharply lower. This followed a plunge in many global stock markets, while pushing up bond market demand and lowering Treasury yields in major economies. The dollar index edged up, the ruble hit a record low, and demand for safe-haven currencies such as the Swiss franc, Canadian dollar, Japanese yen and Thai baht rose.
The West announced several rounds of sanctions against Russia, including plans to suspend the Nord Stream 2 pipeline project and sanction related pipeline companies, ban Russian banks' financial operations in Europe and the United States, restrict Russian sovereign debt issuance, and cut ties to advanced technologies such as semiconductors and aircraft parts. The European Council will also specifically ban the import of goods from the Donetsk and Luhansk regions and restrict trade in specific economic sectors.
1. The escalation of the Russia-Ukraine conflict triggered a sharp shock in global markets, and risk aversion fell after a high risk aversion, risk appetite has recovered
Commodities such as metals, crude oil and grains rose sharply and then quickly retreated.
Influenced by risk aversion, spot gold prices rose to a high of $1,973 per ounce on the 24th, up 1.7% to a new 17-month high. Russia-Ukraine war sparked market concerns about energy and food supply, Brent crude oil rose more than 8% intra-day, touching $105/barrel for the first time since 2014, the highest level in 2014, but then quickly fell back to $95.8/barrel; European gas benchmark prices (TTF) surged 25%, then quickly expanded to 50%, at 118 euros/MWh. 24 CBOT corn rose 5.14% and wheat rose 5.61%. The conflict in Russia, a major global producer of metals, caused palladium and aluminum to jump more than 5%. Platinum, nickel and copper prices all rose more than 1%. Commodity sentiment retreated after the U.S. stock market opened, with gains narrowing and metals such as copper, nickel and palladium all turning down, closing down 0.1%-2.5%.
Risk appetite for U.S. stocks recovered as global equity markets fluctuated dramatically.
The three major U.S. stock indexes opened sharply lower by 2%-3%, and then as a result of Biden's sanctions comments against Russia and his promise
Working with oil-producing countries to stabilize the market, stocks shuddered upward to recover losses. The Dow reported a 0.28% gain, the S&P 500 closed up 1.50% and the Nasdaq closed up 3.34%. the VIX index jumped 7% intraday, after having risen 55% in the previous nine trading days, as asset volatility surged amid the crisis. Earlier, the Moscow Exchange suspended trading at the opening bell, and the MOEX index plunged 45% after resumption. The Russian Central Bank then ordered a ban on short selling and over-the-counter trading, and the MOEX closed down 34%. Major European stock markets opened down 2.5%-4%, with the STOXX50 index opening down 2.75%, down more than 5% at one point during the session and down 10% from its January high, with banking stocks with business exposure to Russia hit hard. German stocks sold off due to heavy reliance on Russian energy supplies, with the DAX down 3.7%. Asia-Pacific markets fell in tandem, with the Hang Seng Index down 3.2% and the Shanghai Composite Index and Shenzhen Composite Index closing down 1.7% and 2.2%, respectively.
Bond market demand is strong and yields are down.
On the 24th, U.S. bond yields fell in unison across maturities, with the 10-year Treasury yield falling about 12.7bp to 1.87%, with the long-end rates falling more than the short-end and the yield curve flattening. The 10-year yield on German Bunds fell 9bp to 0.13%. The U.K. 10-year Treasury note fell 24 bp to 1.24%.
Demand for safe-haven currencies rose as the dollar index edged up and the ruble hit a new record low.
As of 23:00 on the 24th, the U.S. dollar index rose 0.7% and the euro-dollar exchange rate fell 1.1% to 1 euro to 1.118 dollars. Meanwhile the ruble fell nearly 13% against the dollar to a record low of 86.98 rubles to the dollar. Demand for safe-haven currencies rose, with the Swiss franc and Canadian dollar appreciating by more than 0.5%, and investors were optimistic about Asian emerging market currencies, with the yen, yuan and Thai baht strengthening, including the Thai baht appreciating 1.58% on the day.
2. Russia-Ukraine conflict increases global inflationary pressure, Europe and the United States may be forced to accelerate austerity
Russia-Ukraine war may continue to push up commodity prices and global inflationary pressures.
Despite the short-term fall in market risk aversion, oil inventories in major countries are currently at low levels, while Russia, an important exporter of crude oil and natural gas, accounts for about 12% of the world's crude oil supply and 39.5% of the EU's energy imports. War and sanctions could further exacerbate global supply chain tensions, and if Russia cuts off gas supplies to Europe, then consumers and industry will be hard hit. Those countries most dependent on Russian gas, particularly Germany and Italy, would be most severely and directly affected. Any sanctions that threaten supplies will continue to push up international energy prices, thereby increasing inflationary pressures. With Russia as the world's largest wheat exporter, higher food prices from the conflict could further push up global prices. Ukraine is the world's largest supplier of rare gases, with neon gas production accounting for 70% of global production and krypton gas accounting for about 50%. Rare gases are essential materials in the semiconductor manufacturing process, and production disruptions from military strikes will worsen global semiconductor supply tensions. For emerging markets, most emerging economies are net importers of fossil fuels, and if the Ukraine crisis raises oil prices for a prolonged period, the trade balance could worsen and bring about imported inflation.
The probability of stagflation increases, and Europe and the United States may be forced to accelerate the tightening process, but the risk of policy-induced market turmoil increases.
The Fed is fully aware of the substantial impact of the Russia-Ukraine conflict on the tightening process, and the terms geopolitical risks, tensions and unrest appeared four times in the minutes of the January meeting. The market estimates that international oil prices in extreme conditions could reach $120 to $140 per barrel, and already high gas prices in Europe could continue to climb, possibly pushing up inflation in developed economies by about 2 percentage points, prompting Europe and the United States to fast-track the interest rate hike and tapering process. On the other hand, the market shock brought about by the Russia-Ukraine conflict may again weaken the momentum of economic recovery, triggering a decline in growth and employment, and the probability of the West falling into stagflation rises. Against the backdrop of global market turmoil, austerity may also trigger market overreaction, significant volatility in financial markets and increased policy risks. European political leaders are more susceptible to public opinion and have emerged with the sound of monetary policy remaining on hold. For example, ECB Management Committee member Holtzmann said that the Russia-Ukraine conflict may lead to the ECB to delay the exit of the stimulus program.
3. Short-term risk aversion may be repeated, but still a one-time shock
As we have previously reported, historically, the Russian-Ukrainian crisis has had a shorter duration of sentiment shock on international capital markets.
Except for Russia's own capital markets, which began to shake to the downside, both U.S. and Chinese stocks gradually retraced after a brief downward shock. During Russia's annexation of Crimea, U.S. stocks eventually fell only 4% after many days of volatility. So there is no need to panic in the capital markets at the moment.
Risk aversion may be repeated in the near term as the situation changes, but it will remain a one-time shock.
Uncertainty will still dominate market volatility in the short term, but as shocks are gradually absorbed by market pricing, market trends will return to economic fundamentals. For U.S. stocks, continued high inflation and the Fed's policy exit process will be the main logic of the market. For A-shares, despite the impact of market sentiment fluctuations, but the fundamentals of the short term and will not be affected by the substance of the Ukraine crisis, there are still good allocation opportunities, the medium-term trend will depend on the first quarter economic data, the "two sessions" held and the subsequent stabilization of growth policy force situation.
4. Domestic short-term external relations are more balanced, and the probability of significant deterioration in Europe and the United States decreased
Large-scale conflicts have forced the U.S. to shift its strategic focus to Europe, and the probability of a significant deterioration in relations between China, Europe and the U.S. has declined in the short term.
Although the U.S. has placed its strategic priority on containing China, in the current situation, the situation in Ukraine has far-reaching implications for the political situation in Europe, NATO's eastward expansion process is blocked, several NATO members in Eastern Europe may need long-term garrison support, and Germany, Britain and France have different levels of energy dependence on Russia, the U.S. urgently needs to make a strong commitment to European security to prevent the turmoil in Ukraine from triggering a split in European politics. As a result, political and military pressures on the Asia-Pacific region are likely to ease in the short term.
At present, China's overall external relations are more balanced, and the relevant industrial chain is expected to maintain basic stability.
Internally, the government may increase its support for industries such as agriculture, semiconductors and new energy to prevent the impact of international market turmoil from being transmitted along the industrial chain to the domestic market. At the same time, China reached partial consensus and agreement with Russia during the Winter Olympics, which also has a stabilizing effect on domestic food and commodity prices.
5. The future regional situation remains highly uncertain and the market lacks experience in dealing with war risks
The U.S. and Europe reiterated that they are not considering sending troops to Ukraine, and economic sanctions are hard to stop Russia's security demands.
The West has announced several rounds of financial, personal and technological sanctions against Russia, including the suspension of the Nord Stream 2 pipeline project and sanctions against related pipeline companies, a ban on financial operations of Russian banks in Europe and the United States, restrictions on the issuance of Russian sovereign debt, and the severance of ties to advanced technologies such as semiconductors and aircraft components. In particular, the European Council will ban the import of goods from the Donetsk and Luhansk regions, restrict trade and investment in specific sectors of the economy, and ban the export of specific EU goods and technologies to the two regions. If the situation continues to deteriorate, the possibility of stopping the use of Russian SWIFT and limiting the financing of Russian companies on international markets cannot be ruled out. But Europe and the United States on Russia's energy and resource dependence makes the sanctions jealous, economic sanctions can hardly affect Russia's military course of action against Ukraine, unless Europe and the United States on Russia's core demand for NATO expansion to make concessions, otherwise the situation between Russia and Ukraine is difficult to see a turnaround in the short term.
Be wary of the expansion and prolongation of military conflicts that bring new market volatility.
Given that Russia has previously stated that "the purpose of this special operation is to demilitarize and de-Nazify Ukraine," Russia may not stop at the independence of the two republics in eastern Ukraine, but may intend to overthrow the Ukrainian government and establish a new regime, thereby reshaping the European security order. Although Europe and the United States are not willing to intervene, they will not sit idly by while Ukraine is brought under Russian control, and the future direction of the conflict remains unclear. If the war between the two sides spreads to neighboring Poland, it could lead to a direct conflict between Russia and NATO. The turmoil would also put enormous pressure on refugees in Europe and slow down the economic recovery process in Europe. Even if Russia withdraws from Ukraine at a later stage, it will be difficult to restore peace and stability in the region in the short term. Global and especially European energy will continue to be at great risk, and unless the U.S. makes concessions and agrees to hold high-level or top-level negotiations with Russia, or unless the Iran nuclear deal is reached quickly and Iranian crude oil is allowed to enter international markets, international energy and commodity markets will remain under pressure. Financial markets lack experience pricing in war risks of this magnitude, and the direction of the aftermarket is highly correlated with the war situation.
Risk warning: deterioration of the situation in Russia and Ukraine exceeds expectations
Report: Ukraine Crisis: Risk Appetite, Stagflation Risk and Monetary Tightening
Time: February 25, 2022
Analyst: Qian Wei
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