Following multi-month threats, Russia started a full-scale invasion of Ukraine on 24/02/22. This has been devastating for the citizens of Ukraine, so before we speak about the impacts of this event, the team here at HypeIndex would like to say we’ll be keeping everyone affected in our thoughts during these trying times.
The ramifications of this event are widespread and will likely impact almost every market across the globe. Therefore, we feel it's our duty to provide a simple explanation of how this conflict could affect investors during these uncertain times.
Why Does War Affect Financial Markets?
The market hates uncertainty. This is likely one of the only statements that almost every trader or investor will agree with. Generally, most things get priced into the market ahead of time, this prevents factors like CPI data from causing massive swings. However, when something unexpected occurs this balance can be quickly thrown off.
Right now, due to the Russia Ukraine conflict, we’re in a period of massive uncertainty, and the market is reacting accordingly. With the threat of sanctions and the possibility of NATO intervention, there are simply too many factors that cannot be accounted for. For example, Russia is one of the largest exporters of oil, and due to the uncertainty surrounding whether or not Russia will continue exporting and other countries will continue buying, oil prices have soared to their highest heights since 2014.
In modern times, most wars are fought with sanctions rather than bombs. This of course is massively beneficial for the preservation of human life, but is it enough of a deterrent? Global trade is crucial for countries that heavily rely on exports, with Russia fitting into this category. The drawback to this approach is the vast majority of nations need to be in agreement for a sanction to have any effect.
Germany, for example, purchases 45% of its oil supply from Russia. If trade with Russia was suddenly prohibited, Germany would have two choices, live without sufficient oil or buy from elsewhere. While the second option makes more sense, it’s far easier said than done.
The current sanctions imposed on Russia result in the nation being banned from transacting using the dollar or pound. As the dollar is the currency of choice for global trade, Russia has been put in a sticky situation. They will either have to find another currency to transact in or go without money from global trade.
Additionally, removal from the SWIFT system prevents Russia from being able to easily send money internationally. Therefore, trade with European countries will be far more difficult.
Which Markets Could be Positively Impacted?
As Russia sells billions of dollars worth of oil yearly, whichever currency they choose to transact in will see a massive increase in demand, which usually results in increased prices. Furthermore, economic turmoil tends to result in rising demand for safe-haven assets like gold.
Gold - As the Ruble tumbles and inflation catapults, Russian citizens have no choice but to look toward assets that have proven to hold value during periods of war. Gold is perhaps the best choice as it's stood the test of time, is widely accepted, and is fairly easy to trade. Since the start of February, the price of gold has climbed from $1800 to $1907, an increase of around 6%. Conversely, the S&P has fallen by 2.9% over the same period.
Bitcoin - Bitcoin is in a precarious position. Currently, it follows the S&P. However, Bitcoin could be a viable choice for Russia to transact globally. They have already loosened their cryptocurrency laws, so it's certainly on the cards. If Russia goes this route, we could see a decoupling from the stock market as demand for Bitcoin skyrockets.
Oil - Russia is one of the world's foremost producers of oil. As a result of this conflict, nations have been forced to look for alternative suppliers, causing the price of oil to hit 8-year highs.
Which Markets have been Negatively Impacted?
Massive uncertainty has caused worldwide markets to be unusually volatile. Although this volatility is beginning to lessen, it’s already had a huge impact.
Stock Market - The US stock market felt the full brunt of the conflict with stocks across the board dropping anywhere from 0.5% to 10%. With Russian and Ukrainian stocks getting affected worse. However, the market has begun to price in this volatility, with the US stock market starting to show signs of strength.
The Russia Ukraine conflict has been devastating for the entire world. Citizens of both countries have had their lives turned upside down and have been forced to leave their homes. Hopefully, now that Ukraine and Russia are in peace talks, we’ll soon be able to begin building back up. Once again, the team here at HypeIndex would like to offer our sympathy to those affected.