The Russian invasion of Ukraine which began in the early hours of 24th February has unsurprisingly caused turmoil in the markets. Nowhere has it been more keenly felt than in the commodity space, with prices for oil, wheat, iron ore and other key commodities reaching multi-year, in some cases record, highs. The impact on other asset classes such as equities, bonds and currencies, whilst material, has not been quite so dramatic yet.
In equity markets the immediate impact of the invasion was to put an abrupt halt on the underperformance of growth stocks, particularly US Tech, which had been a feature of the previous couple of months. Indeed, on the day of the invasion, the US market, notably the NASDAQ, having been down heavily in the futures market pre-opening, rallied strongly throughout the trading session to end the day markedly higher, in contrast to European equities. This trend of US outperformance has continued, so that year-to-date the S&P 500 is now down 10%, compared with a 15% drop in the European Stoxx 600 index, although still trailing the resources heavy UK market, which is currently down less than 5%. Whilst technology and resources have been the sectors in favour with investors since the invasion began, selling of financials and automakers, together with any individual stocks perceived to have Russian exposure, has been the pattern. Going forward, the potential for a sharp rebound in these sold off sectors and European equity markets generally, notably the German Dax, is considerable were the war in Ukraine to de-escalate. We have no particular insight into the likelihood of this however so retain our stance that a balanced portfolio of carefully chosen stocks remains the best approach for investors.
The effect of the invasion on bond and currency markets has unsurprisingly been a flight to safety. This has led to US 10-year treasury yields falling back from over 2% prior to 24th February to their current level of 1.9%, despite the confirmation on 2nd March from Federal Reserve Chairman, Jerome Powell, that USD interest rate will increase this month, most likely now by 25bps. The US Dollar has been a beneficiary of its safe haven status against other major currencies, whilst as could be expected the Russian Ruble has collapsed, initially losing up to 50% of its US$ value on the invasion.
It is within commodities that the most dramatic price action has been experienced with significant upwards pressure on energy and foodstuff prices, as Russia and Ukraine are major exporters of energy and agricultural commodities. The oil price, which was already in a strong upwards trend, gained over 20% since the invasion, to reach a recent peak of $120 for Brent, the highest level since 2008. Similarly, the wheat price has also reached a fourteen year high, having again already been trending upwards on a tight supply and demand picture. Overall, the surge in commodity prices from already high levels, if not reversed quickly, has significant implications for inflation.
We share the global concern at the situation in Ukraine and don’t wish to make predictions on likely outcomes. Historically, selling equities at the onset of war is rarely the best decision and for the medium term they remain our asset class of choice, providing a better hedge against inflation than bonds or cash.
James Buckley is a Senior Equity Research Analyst with Cantor Fitzgerald Ireland.
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