The nervousness on the markets has been palpable for days. Now the Russian invasion has shattered the last hopes on the financial markets. Stock markets and the economy are facing turbulent times.
Russia’s attack on Ukraine sent shockwaves through capital markets around the world.
«The worst fears have come true. There is war in Europe,” said portfolio manager Thomas Altmann from QC Partners in Frankfurt. Share prices plummeted worldwide, many investors fled to investments such as gold and German government bonds, which are considered safe in times of crisis.
According to economists’ calculations, consumers could face drastic price increases, because Russia is a major supplier of gas for Germany and Europe, but also, for example, one of the world’s largest suppliers of aluminum, which is found in many products.
Raw material prices that continue to rise rapidly could heat up the inflation that has been high for months. A barrel (159 liters) of North Sea Brent oil cost more than $100 on Thursday for the first time since 2014. Aluminum price climbed to a record high of $3388. A bushel of wheat cost just under 935 US cents, the highest it has been since 2012.
Russia could react by stopping gas deliveries
Experts do not rule out that Russia will react to tightened economic sanctions by stopping its gas supplies and thus driving the price spiral. “If there are more serious supply restrictions, the gas price (…) could increase even further. In this (…) scenario, the inflation rate would climb to 6.1 percent this year and to five percent in 2023,” calculated the German Economic Institute (IW) for Germany. “Consumers, but also companies, would have even less in their wallets than they already have.”
The German economy is preparing for major setbacks. “The economic consequences of this invasion are not yet foreseeable, but they are certainly serious,” said the President of the Association of German Chambers of Industry and Commerce (DIHK), Peter Adrian, of the German Press Agency. Germany’s export-oriented machine builders expect that punitive measures against Russia will also affect their business. At the same time, the President of the VDMA industry association, Karl Haeusgen, emphasized: “The VDMA supports the decision to severely sanction the aggression.”
So far, economists have assumed that the German economy will grow again in spring after a weak winter as a result of the ongoing corona pandemic. However, the escalation of the Ukraine conflict is poison for the economy. “With the current developments, our negative scenario, an open war between Ukraine and Russia, has occurred,” said the Landesbank Baden-Württemberg (LBBW). “We assume that the real economy around the world will have to accept noticeable losses.”
Aluminum climbed to a record high
Commodity prices rose sharply on Thursday: a barrel (159 liters) of North Sea Brent oil cost more than $100 for the first time since 2014. Aluminum price climbed to a record high of $3388.
On Thursday morning, Russian President Vladimir Putin officially ordered the attack on eastern Ukraine. US President Joe Biden, the Western allies and NATO sharply condemned Putin’s actions and announced further sanctions. Biden said Russia “deliberately” started a “war” against Ukraine.
Stock markets across Europe opened with large losses. The stock exchanges in Asia also reacted to the Russian invasion of Ukraine with heavy losses. In Tokyo, the leading index Nikkei 225 went down 1.81 percent at 25,970.82 points. The CSI 300 index of the 300 most important mainland Chinese companies fell 2.03 percent to 4529.32 points.
The sell-off continued on the Russian stock market: the RTS index collapsed by almost half to 612 points. Within six trading days, the losses there added up to around 60 percent. Russia’s central bank announced interventions in the foreign exchange market after the ruble fell to record lows against the US dollar.
Investors fled to gold or government bonds
Important stock market barometers in the USA had already slipped on Wednesday: The Dow Jones Industrial fell to almost 33,085 points, its lowest level since April 2021. The broad S&P 500 lost 1.84 percent to 4225.50 points. It also fell to its lowest level since June 2021, as did the technology-heavy Nasdaq 100, which ended up losing 2.60 percent to 13,509.43 points.
Investors fled to gold or government bonds: a troy ounce of gold (around 31.1 grams) cost 1949 US dollars in early trading, which is the highest level since January 2021. The German bond market also rose: in the morning the trend-setting futures contract euro- Bund future by about one percent to 167.64 points.
The European Central Bank (ECB), which is expected to set the course in March to end its monetary policy, which has been ultra-loose for years, must take the war in Ukraine into account in its decisions. “We will make a full assessment of the economic outlook at our March meeting. This also includes the latest geopolitical developments,” said ECB chief economist Philip R. Lane in an interview with the “Frankfurter Allgemeine Zeitung” published on Wednesday evening. “The geopolitical tensions are currently a very significant risk factor, especially for Europe,” said Lane.