Written by: Susannah Streeter | Hargreaves Lansdown
Investors have been rattled by the turn of the fighting in Ukraine, after a nuclear plant was attacked which has heightened worries about the potential escalation of the crisis. The flight to safety is continuing on the financial markets as investors exit positions they see as more risky, and pile into other asset classes which they hope may offer some more defence against the volatility. Just over a week on from invasion, shockwaves are still sending repercussions across the world with many commodities shooting up to record levels and others to a price not seen in more than a decade.
The FTSE 100 in London dropped by 2.5% while the Dax in Frankfurt fell by 2.9% and CAC 40 in Paris plummeted 3% in early trading.
Travel related stocks are again among the biggest dippers with British Airways owner, International Consolidated Airline Group, and Rolls Royce, with its large aerospace businesses, falling. There were fresh falls for engineer Melrose after it delayed a shareholder payout this week due to the turmoil caused by Ukraine. Packager Mondi was the biggest faller on the FTSE 100 in early trading, as investors fretted about its exposure to the conflict. It’s already suspended production at a plant in Ukraine, but it’s the fate of its Russian plant, Syktyvkar, which accounted for 12% of the group’s revenue in 202, which is causing concern, given that finding a buyer for the site will be nigh on impossible right now. Among the few risers are gold miner Fresnillo and BAE Systems as investors assess their strength in times of market uncertainty and the expected expansion of defence budgets. There is also some bargain hunting going on amid the volatility - the beleaguered Russian miner Evraz lifted 17% in early trade, and Polymetal International also rose 5%.
Commodities are on a seemingly unstoppable march upwards, adding to fears that the conflict will damage global growth as import costs rise dramatically and companies and consumers are forced to take big hits on their budgets. A closely watched barometre for raw materials, the S&P GSCI index, has leapt by more than 15% in just a week, with little sign that prices will ease anytime soon. The cost of wheat has rocketed with contracts traded in Chicago up by 40% over the last seven days. That is piling the pressure on food producers who are also having to cope with higher transport and logistics costs.
Oil is still highly volatile, and although Brent crude has fallen back from Thursday’s spike to $119 a barrel, it’s still staying elevated above $111 dollars, as traders assess supplies from Russia. EU natural gas prices have eased from their all time high on Thursday down to around €160 per megawatt-hour. The price remains highly sensitive as although the sanctions stop short of hitting the energy supplies directly, they have already made it much harder for Russian companies to ship tankers of oil and gas given the ban on vessels in European ports.
Government bonds have also been in demand as investors have sought out the perceived safety of debt, which has pushed the yields down. Ten year US Treasuries dipped dramatically by 0.5 percentage points before inching back up a little, while the yield on Japanese ten year notes also fell. Gold has gained more lustre, with the spot price nudging up again, with the precious metal set to make the best weekly gain in almost nine months.
With raw material costs rocketing, it’s adding to the inflationary tinderbox. Given the added pressure, the US central bank, the Fed, seems unwavered in its intention to tighten monetary policy in response, as concerns grow that higher prices could become embedded in the economy. Chairman Jerome Powell says he’s still behind a 0.25% rate rise at the next meeting. The closely watched US jobs numbers out later are expected to show another month of strong employment as Omicron retreats. Policymakers will still be keeping a close watch on ominous events in Ukraine, which risk rippling out further into the global economy.