The war in the Ukraine caused by the Russian invasion is the dominant topic around the world. In particular Western states widely underestimated Putin and the likelihood of the Russian invasion. Initial rumours anticipated an invasion from Russia on Monday, 14th February 2022, as Russian troops supposedly retreated. After the invasion did not take place then, there were some signs of relief, which were short-lived. Fears started to grow when Putin acknowledged the separatists in the Eastern Ukraine, more specifically, Donetsk and Luhansk. There were crucial similarities compared to the annexation of the Crimea peninsula in 2014. While this was going on, Western countries threatened Russia with sanctions. Those did not achieve a meaningful impact, as on Thursday morning, the worst case in that situation occurred. Russia invaded the Ukraine from all angles and managed to shutdown their missile defences almost immediately. Russia conquered several parts of the Ukraine extremely quickly and found itself soon on the doors of the capitol, Kyiv. Later that day, sanctions on Russia were imposed by the US, the UK, the G7 states and most other European countries. These included freezing the assets of some of Russian elites, some banks and businesses in the respective countries. This sanctions prohibit being involved in any kind of business with those individuals, banks or businesses. The US also banned individuals from trading Russian sovereign debt. Those sanctions had little impact on the invasion of Russia. Most people hoped the sanctions would be harsher, but at that point Europe was reluctant on banning Russia from SWIFT due to their reliance on Russia’s oil and gas. The invasion truly changed into a war in the city of Kyiv and over time most countries around the world support the Ukraine with additional weapons and ammunition, while some countries even sent soldiers to help defending the country. On Monday, the SWIFT ban from some Russian banks was announced as well as the extension of listed targets and institutions whose assets are frozen. Initially, Russia’s goal was to de-weaponize the country and to replace Zelensky, the prime minister of the Ukraine, by a more pro-Russian government. Russia employed substantial propaganda and legitimized the invasion by calling the Ukraine being full of Nazis among other things. It now seems very questionable whether replacing the government was the initial target, as it feels much more like a full annexation. This puts in particular the Baltic states into a state of alert, as if Putin’s goal to recreate the former Soviet Union, then they are likely the next target. This also explains the harsh threats from Russia when discussions were held whether Finland should become a NATO state. Further unpleasant developments are that China can be considered neutral towards Russia’s actions, as they first supported the Russian invasion given the reasons from Russia. However, they also followed through on Zelensky’s call to talk to Putin on possibilities to resolve this war. After an initial discussion between the Ukraine and Russia was denied by the Ukraine, it seems to be likely that Putin and Zelensky agreed to a meeting. This comes after Russia’s threat of using nuclear warheads. Unsurprisingly, markets reacted with tremendous volatility over the past two weeks. The sanctions on Russia had a detrimental effect on Russia’s economy. The Russian Rubel collapsed by 30% after Western countries announced the SWIFT ban for some Russian banks, after the Rubel has already lost substantially in value since the start of the invasion, as shown in Figure 1. Russia’s equity market also took a huge hit. On the day of the invasion, the MOEX Russia Index dropped by almost 50% from 3,200 down to 1,700. Despite its recovery, it is questionable how Russian equities will perform in the short-term future, as further sanctions are likely and make doing business outside Russia very difficult.
Central banks, inflation concerns, and geopolitical tensions dominate the market in 2022 so far. Inflation keeps rising in 2022. In the US, the CPI already hit 7.5%, the highest it has been since 1982. Energy remains the key driver of inflation at the moment. In Europe, inflation slightly increased from December 2021 to 5.1% in January 2022. In the UK, the increase in inflation is steeper than in Europe with +0.4% last month to 5.4% in January 2022. Unsurprisingly, energy is also the driving force in the UK. Central banks try to keep inflation under control, which they need to do by raising interest rates, which may have a substantially negative impact on the economy. Hawkish central banks are also responsible for the substantial volatility in the equity market. In particular more speculative sectors, such as technology suffered substantially. The two major contributor for the losses in equity markets were the meeting of the Fed at the end of January 2022, in which rate hikes in March 2022 were hinted, and the Russia-Ukraine crisis. Equities recovered slightly since the Fed-meeting, although markets are again bearish. This is largely caused by the substantial likelihood of the Russian invasion in the Ukraine, as meetings between Russia and the US among others have not yielded any results. The tension of these two major events had a substantial impact on the stability of financial markets, as the VIX index highlights in Figure 1. Both events trigger quite strong reactions in a very short time. The situation is far from over, as it is rumoured that a Russian invasion is imminent. Safe haven assets like gold are slowly increasing in value. Gold is trading at $1,850 per ounce, which is slightly higher than it has been on average since its all-time high back in 2020. Oil prices keep surging as well. US oil prices even reached $90 per barrel and are headed for the $100 mark due to the geopolitical uncertainties. Oppositely, Bitcoin (BTC) which is frequently called an alternative to gold cannot compete. Since it peaked in November 2021, it decreased substantially alongside the entire cryptocurrency market. As many currencies have lost more than 50% from their peak in Q4 2021, people oftentimes speak of another ‘crypto winter’, which refers to what happened in 2017/18, when the entire market completely collapsed.
|
|