Russia’s military invasion of Ukraine has hit global markets, with equities falling around the world as investors flee for safe haven commodities.
Brent futures, an oil price benchmark, crossed the $100 per barrel mark for the first time since 2014 as fears rose regarding supply. Russia is a major exporter of oil and gas, and the country is now likely to face increased economic sanctions from Western nations in retaliation for its actions in Ukraine.
“The long list of sanctions that Western countries, whether from the US or the EU, have tried to box in Russia in various ways, but never targeted the actual flow or price of commodities, particularly oil and gas,” Steen Jakobsen, chief investment officer at Saxo Bank said.
“That will now change: and the Western powers will have to hurt themselves if they are to hurt Russia as new sanctions are likely to affect the flow of commodities itself and possibly Russia’s financial system and its access to the world. This will in itself lead to much higher inflation both in the short and medium-term,” he added.
Jarand Rystad, the CEO of energy research firm Rystad Energy, said that while full-scale military conflict between Russia and the West is unlikely, further deterioration of economic relations is highly likely.
While Russia’s economy stands to suffer from sanctions action, the West will not be able to act without causing economic hardship to itself, Rystad said.
“Demand for oil and gas in the West is only rising, and a global energy crisis is likely to unfold,” he explained.
Inflation in the spotlight
Inflation has been rising globally as demand for goods has increased while global supply chain disruptions caused by the Covid-19 pandemic continue to cause issues. In addition, a shortage of energy supply has further hurt inflation outlooks, with experts warning that businesses need to prepare for rising costs in 2022.
“Notably, despite the effect that the spike in energy prices should have on increasing headline inflation in an environment of already uncomfortable inflation, the market is now pricing in that Central Bank action should turn more dovish, and rowing back on the number and pace of rate hikes,” Altaf Kassam, EMEA Head of Investment Strategy and Research, State Street Global Advisors said.
Russia’s actions in Ukraine now mean that “already strained markets are becoming further stretched as significant oil and gas volumes are now at risk,” Rystad said.
Analysis done by Rystad Energy points to oil prices potentially surging up to around $130 per barrel, with consumers around the world set to feel the squeeze at the gas pump and in their power bills.
“The reality is that significantly higher prices are on the horizon in Europe and overseas,” Rystad commented.
While the crisis is likely to cause inflation to rise in the short term, the long-term outlook remains broadly similar despite the crisis, Majd Dola (CFA), equity portfolio manager at First Abu Dhabi Bank, said.
“Our mid-term 6-9 months inflation outlook remains the same, we expect some components of the CPI to ease as we progress into the second half of the year, though in the short term inflation readings will stay elevated,” he said.
For oil prices, Dola believes that the future is likely to see prices trending lower, with the Iran nuclear deal on the horizon, winter ending, US tapping strategic reserves, and OPEC increasing supply.
“No one wants oil above $100 even Saudi Arabia as these high prices might hurt ultimately demand, and sanctions on oil is off the table for now, in our view,” Dola said.
Equities in Europe face uncertainty
Military actions broadly lead to increased uncertainty. In Russia, the MICEX dropped 30 percent following the country’s invasion, with the ruble weakening to around 88 to the dollar.
“Eurozone futures indicated down between 4-5 percent, but NASDAQ and S&P500 also down between 2-3 percent at time of writing … The largest effect of sanctions, which we expect to be announced later, should be on the Russian market, but the Eurozone (especially Germany through its reliance on Russian energy) should be most affected by the conflict of all the developed markets,” Kassam said.
Dola agreed, noting that the Eurozone market is “weak for now.”
“We would like to underweight Eurozone for now and increase exposure somewhere else. Risk remains high which require investors to be nimble, diligence, and patient,” he said.
The Middle East, however, is a different story, with Dola stating that he continues to be “bullish on Saudi equities and the MENA region in general.”
Follow us on
