Commodity Markets Respond to War in Europe

After weeks of anticipation, Russian president Vladimir Putin ordered a military offensive on Ukraine early Thursday morning. As of the time of writing, Russian missiles were being continuously fired on six major Ukrainian cities, beyond the breakaway border regions Putin pledged to defend on Monday evening. Traders from Tokyo to Paris are already responding to this highly disturbing geopolitical development, and the prices of key Commodities are spiking. (source: nytimes.com)

Commodity Crunch

Before the sun rose in Eastern Europe on Thursday morning, explosions were heard throughout Ukraine, with major airports taking missile fire and reports of a possible land invasion coming in from the southern city of Odessa. Ukrainian President Volodymyr Zelensky has declared the implementation of martial law as the capital Kyiv, has come under heavy attack from Russian troops stationed over the border. In response, Western powers, including the United States and the United Kingdom, have pledged the strengthening of economic sanctions against the Russian Federation. 

Commodity markets are already responding to this heretofore unseen military offensive. Gold (XAU), traditionally a safe haven for investors in times of inflation and economic instability, has risen 2% this morning to a price of over $1946 an ounce. Additionally, fulfilling expectations previously put forth by experts in the petroleum industry, the price of Oil (CL) has already begun climbing upwards as traders express fears that the war in Ukraine could cause a disruption in supply lines from Russia. 

As of Thursday morning, the price of Crude Oil has shot up 6.3% to over $98 a barrel, with the international price benchmark Brent Oil (EB) rising 2.6% to reach triple-digit prices for the first time since September of 2014. The war in Ukraine could have repercussions far beyond the post-Soviet nation’s borders, with some warning that such a drastic rise in the price of petroleum, if sustained, could push already-high U.S. inflation to double-digit levels, not seen since the early 1980s. This is due to the fact that a rise in Oil prices would increase the cost of economic inputs for businesses from a variety of sectors of the American economy, which could then pass these costs on to consumers.

If the Consumer Price Index indeed shows such a steep hike in prices for the average American citizen, all eyes will be on the Federal Reserve to see how the U.S. central bank will grapple with this severe macroeconomic challenge. Analysts from Blackrock, the largest money manager in the world, fear that an overly zealous response on the part of the Federal Open Market Committee, taking the form of rapid increases in the rates charged by banks for overnight lending, could stymie nascent post-coronavirus economic growth. Global indices may already be bracing for this challenge.

Index Instability

Stock markets across the Eurasian landmass dropped on Thursday morning as news of the intensifying conflict spread. Over the course of trading, the Hang Seng Index (Hong Kong 50) fell by 3.2%, while Tokyo’s Nikkei 225 (Japan 225) dropped 1.8%. Some market watchers opine that traders are responding to geopolitical instability by moving their money out of stocks perceived to be ‘risky’, such as tech and growth shares, putting Indices as a whole on a downward slope. Although Asian countries themselves may be relatively insulated from the spillover effects of the war in Ukraine, they will most likely not be immune to the implications of a rise in global inflation and petrol prices.

European traders were not immune to this negative shift in market mood either; Germany’s DAX Index (Germany 40) fell 3.3%, the FTSE MIB (Italy 40) in Italy sank 2.7%, and London investors pulled the British FTSE Index (UK 100) down by 2.3% as of Thursday morning. European Union political leaders, including European President Ursula von der Leyen and head of the European Council Charles Michel, have made strong statements against the Russian Federation’s aggression against its neighbour and have pledged wide-ranging sanctions, notwithstanding Putin’s warning to the world against interference in the conflict between the two post-Soviet states. 

It remains to be seen whether concrete steps to stop the war in Ukraine will be taken, and if they will have a calming effect on stock markets. For now, traders will have to make investment decisions in an environment of great uncertainty, with the resultant repercussions for global commerce.