As Europe sees its biggest conflict since 1945, what impact does it have on the global financial markets?
Traditional Safe-havens like The U.S Dollar, Gold and treasury bonds are seeing a spike, as risk assets such as stocks continue to tumble. Ultimately, no one knows what this invasion means for everything from monetary policies to global energy prices and currency strengths, nevertheless, investors need to brace for a short period of volatility in the global economic market.
The showdown in Eastern Europe has an immediate and major influence on the U.S market, although America imports very little from Russia. The reason for this, is that it all ties back to Oil and Gas, as Russia produces 10% of the global demand, therefore a significant change in the supply can affect Americans directly in the form of soaring energy, fuel and food prices, coupled with the high level of inflation that is currently thematic in all global markets.
In terms of the stock market, The Dow closed higher, rising 91 points to 33,223. That swing came after the index had plunged more than 800 points in early trading. Other major U.S. stock indices also recovered their footing, with the S&P 500 rising 1.5% by the close of trading and the tech-heavy Nasdaq jumping 3.3%.
The Dollar is set to strengthen as we see a continued sell-off in risky asset classes like stocks and cryptocurrencies as investors turn to buy gold and the US dollar which are seen as safer investments at times of uncertainty. Human psychology dictates that investors will always seek asset protection as opposed to taking on any risk to their portfolios for a short term gain.
In the midst of the largest conflict since World War II, European stock markets tumbled into a sea of red late this week. In London, investors who have money in UK equities were squeezed as the FTSE 100 (FTSE) fell 3.8% on Thursday, while the French CAC (FCHI) also tumbled 3.8% and the DAX (GDAXI) was trading 4% lower in Germany. Market analysts are ringing the alarm and affirming that it isn’t an exaggeration to admit that Europe is at its most dangerous and uncertain juncture in a very long time, which is prompting a mass sell-off in major stocks.
Commodity markets have also been reacting to the current geopolitical tensions as Brent futures topped $100 per barrel for the first time since 2014, and this will no doubt be felt by the consumer at the filling station. In a South African context, Russia is a key producer of crude oil and the market is nervous that oil supplies will be disrupted because Oil is South Africa’s biggest import item, so the immediate impact on consumers’ pockets will be higher petrol, energy as well as food prices.
Petrol looked set for a hike of around R1.25 a litre in the first week of March. This would push the price of 95 octane petrol in Gauteng to a record high of above R21. However, the petrol price hike is now bound to be even steeper due to the latest oil run, as well as a sharp shock to the rand on Thursday.
As investors move their money away from risk assets and emerging markets amid the current geopolitical tensions, we saw gold going on a rally along with other safe havens like the Dollar. The price of the yellow metal jumped just over 2% yesterday as Russia invaded Ukraine, which pushed the price to $1 937.82, the highest in over a year since January 2021. This month alone, gold has risen by 8% on the back of these tensions before they escalated into troops on the ground, and it will no doubt continue to rise and potentially break above the $2 000 mark because in times of economic uncertainty gold is considered a safe store of value.
Meanwhile, as investors continue to withdraw from risk assets, the prices of major cryptocurrencies continued their retreat this week as the Russia-Ukraine crisis boiled over and crypto buyers and other investors pulled out of emerging markets and fled to safer havens like the U.S. dollar and gold. Similar to stocks, Bitcoin took a hit in the early trading session on Thursday but recovered later in the day as the price for the cryptocurrency increased by 3.2%, which shows its resilience in the face of other risk assets taking a plunge while it remains buoyant as a reliable store of value for investors.
The Optimal Play
The impulsive thing would be to sell into a falling market, but this is the polar opposite of what a seasoned and calm investor would do. When the aim is to buy low, the approach that best serves the most successful investors is being calm while everyone else runs around in a panic.
However, investors that have offshore exposure on their portfolio through Aluma’s Global Note will be on the better side of things as they watch the Dollar continue to strengthen against the basket of global currencies because of its safe-haven status amid the global uncertainties the geopolitical landscape is currently presenting. If you are looking to spread your risk you can contact Aluma today to diversify your portfolio and gain Dollar exposure through Aluma’s listed Global Note.