The current situation in Ukraine, where Russian armed forces have occupied the southern peninsula of Crimea, has created a standoff between Russia and the West, culminating in obvious political tensions and consequences. What impact does this have for the global markets? And what does the future hold? Michael Kodari investigates.
In short, the global impact is varied, but there’s no doubt that geopolitical concerns has added a lot of volatility with investors being left uncertain as to what can happen. This was best exemplified when stock markets worldwide plummeted amidst fears of military action in the first Monday of March, only to see the markets having a relief rally the following day, following Putin’s comments in his press release to ease tensions.
These are the global impacts of the crisis in Ukraine.
1. Impact on Russia and Ukraine
Unsurprisingly, Russia and Ukraine have been the worst affected by the crisis, with the MICEX (Russia’s leading stock index) falling almost 7% in one week alone, and it’s national currency, the Ruble, dropping almost 10% in value this year, forcing it’s Central Bank to lift interest rates from 5.5% to 7% to help curb the capital outflow. With Ukraine not paying it’s energy bill to Gazprom, the EU has given $15 billion in aid to Ukraine to avoid defaulting, but this could negatively affect Ukraine like it did Greece, Ireland and Portugal during the Eurozone crisis.
2. Higher commodity prices
This threat of disruption has seen commodity prices soar with Brent crude oil soaring up to $109/BBL, up from $105 in February.
The situation in Ukraine has also seen soft commodities like wheat and corn surge, with wheat futures reaching 18 month highs of $6.26 a bushel, and corn futures seeing a six month high last week of $5.024 a bushel. The uncertainty in the market was demonstrated late last week by a 14.9 jump in the Euro STOXX Volatility Index .V2TX, a sign of investor apprehension. This uncertainty has led to a surge in gold prices which has become a natural hedge against volatility from $1326/oz to $1350/oz.
3. Impact on Europe
The heavy reliance of Europe on Russia and Ukraine for its natural gas supplies and food respectively has meant the current turmoil has significant potential repercussions for Europe. Gazprom, Russia’s largest oil producer and developer, has already threatened to cut off supply to Ukraine over unpaid bills leaving EU leaders concerned about its future gas supply.
Ukraine has long been known as Europe’s breadbasket for its abundance in soft commodities like wheat, corn and grain, and Russia’s current hold of Crimea has effectively blocked one of Ukraine’s main export routes, leading to potential surges in the price of food in Europe. These concerns have led to European shares falling in the first week of March with the FTSE 100 and CAC 40 dropping over 1% and Germany’s DAX closing more than 2% down.
4. Impact on the US
While investors will still be concerned about the crisis in Ukraine, the US has a very small trading partnership with Russia compared to Europe. While the overall situation might not be ideal, the boom in commodity prices has represented opportunities for the US to take advantage of a potential change in the supply pattern of resources like energy and grain. With Europe concerned about future gas supply as well as a reluctance to be dependent on Russia, it is already seeking the US as an alternative supplier of energy. This is currently being prevented by national policy restrictions surrounding exporting licenses with six LNG terminals being approved by the US Department of Energy with 24 still under review. This could represent an opportunity for the shale gas export industry in the US. The disruption in supply of grain from Ukraine could also represent increased demand for US agricultural products which could really benefit the energy and agriculture sectors in the US markets.
5. Impact on emerging markets
The current crisis in Russia has spelt disaster for the emerging markets as indicated by a 1.6% drop on the MSCI Emerging markets index in early March. This is parallel to the Eurozone crisis and the Asian financial crisis of the mid ’90s where fund managers and general sentiment can affect the stocks of neighbouring countries or countries categorised similarly. For example, because of the crisis in Russia, fund managers would not only rid themselves of Russian and Ukrainian investments, but other BRIC countries, and other emerging economies of a similar size and profile.
6. Impact on Australia
Similarly to the US, there is very little direct impact Ukraine has on the Australian markets due to our minimal trading activities in the region, but nevertheless our markets follow the global markets at large. Thus a continued crisis could see the stock market be impacted but not to the extent of Europe. As a resourced-based economy, the rise in commodity prices represents profitability in our agriculture sector. The surge in oil prices has been reflected in the energy sector outperforming the rest of the market.
So what are the likely future results of this crisis? It depends on the outcome of the conflict…Excerpted from an article originally published in the May/Jun 2014 issue of YourTradingEdge magazine. If you are a subscriber to YourTradingEdge magazine, you will receive this article in your May/Jun 2014 issue of YTE. If you are not a subscriber, click here.