Russian invasion of Ukraine: Worldwide effects on capital markets

Overview

On the 24^th of February, Russia has officially launched a so-called “special military operation” in Ukraine. Their official aim is to “demilitarize and denazify” Ukraine. Ukraine is experiencing nationwide bombings, mass evacuations and fighting in the streets. The conflict has been going on for a few weeks now and the end of it seems impossible to predict. Most world leaders are condemning the attacks and are releasing numerous sanctions on Russia and its oligarchs.

The war has caused significant turmoil in the financial markets, especially in the commodities market. War creates uncertainty in the minds of investors trying to predict the outcome of a conflict which most people deemed unlikely to occur in the first place. Commodity prices are on the rise, largely due to fear of shortages given Russia and Ukraine’s vital position in this market.

Influence on base metals price

The most extreme price influx in the commodities market due to the war in Ukraine has been that of Nickel. On the 11^th of March 2022, the London Metal Exchange (LME) suspended trading of Nickel for the first time in its 146-year history after the price doubled to $100,000 a ton (See Figure 1). Psychology plays a significant role in the minds of investors, and the fear caused by Russia’s actions has created worldwide panic, as Russia supplies 10% of the worlds Nickel. The price propulsion was mainly caused by a so-called short squeeze. A short squeeze occurs when the majority of traders are short on an asset, but the price then rises past an anticipated point, which forces said traders to buy back the asset due to a margin call from their brokers, driving the price up further.

Figure 1: The Price of Nickel year to date

The price of wheat has also risen dramatically to a 9-year high last week, putting pressure of the world’s food supply (See Figure 2). Russia alone accounts for around 18% of the world’s wheat exports and its threats of cutting export supply are not helping. Russia and Ukraine together make up around a quarter of the world’s supply and investors fear the war will disrupt trade routes in the Black Sea along with production. This perception has proven beneficial for US wheat producers, as their supply remains steady regarding geopolitics. Nonetheless, the world’s dependency on wheat as a source food might be further challenged in the future. Its future price remains uncertain, as issues due to droughts in the US may show further difficulties for its supply.

Figure 2: The price of wheat year-to-date

The price of oil has also seen significant action recently due to the conflict. Last week, on the 8^th of March the price momentarily reached a 14-year high point of $130.5. However, the price has seen major downward momentum as of the 15^th of March falling below $100 a barrel. The price action of oil over the last 6 months can be seen below in in Figure 3. As part of the numerable sanctions punishing Russia, the US banned all imports of Russian oil into the country. The UK plans to phase out of said imports by the end of 2022. Germany on the other hand announced it does not currently consider banning Russian imports of oil and gas, likely due to fears of an energy crisis.

Figure 3: Price action of oil over the past 6 months as of 16.03.2022 (Source: Trading Economics)

Other commodities showing price influxes include aluminium, copper, zinc, lead, coal, and natural gas.

Influence on other markets

The crypto and stock market has seen a major drop in many assets and key indices due to the crisis along with fears of dramatic rises in inflation levels. Volatility has, as usual in times of war, increased. As of the 26^th of February, one Trillion in US dollars was wiped of the markets.  Figure 4 below showcases the price action of European stocks, the MSCI Emerging Markets, as well as the Nasdaq in the end of February.

Figure 4: Price Action of major indices (26.02.2022, Source: Reuters)

In the past week, the price of gold surged to surpass the $2000 an ounce barrier all the way to $2047 and nearly reached its all-time high of $2085, as it is considered the most popular safe haven amid times of crises and high inflation (See Figure 5)

Figure 5: The price of oil year to date (Source: Trading Economics)

Summary

Commodity price increases will likely have macro effects throughout the world. Increases in food prices will especially affect emerging economies, such as the Middle East and Africa. Also, the manufacturing of electronic goods may become more expensive. One can only hope that the conflict will end soon, in order to avoid further death and destruction.

References

Quinio, Akila. “Investors Buy Gold in Response to Ukraine War.”Subscribe to Read | Financial Times, Financial Times, 11 Mar. 2022, https://www.ft.com/content/135418bb-9b86-43ac-b7d4-de2bf4c1a327.

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2. Gailey, Alex. “Experts React to Falling Crypto Prices after Russia Invasion of Ukraine – Here’s What Investors Should Do | Nextadvisor with Time.”Time, Time, 1 Mar. 2022, https://time.com/nextadvisor/investing/cryptocurrency/experts-react-fallingcrypto-prices-russia-ukraine/.
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4. Reuters Staff, Reuters Staff. “Europe at War: 6 Charts Showing the Impact on Financial Markets.”World Economic Forum, 2022, https://www.weforum.org/agenda/2022/02/europe-at-war-six-charts-toknow-in-financial-markets.
5. Montana Public Radio | By Edward O’Brien. “Wheat Prices Hit a 9-Year High after Russia’s Invasion of Ukraine.”Montana Public Radio, 7 Mar. 2022, https://www.mtpr.org/montana-news/2022-03-07/wheat-prices-hit-a-9-yearhigh-after-russias-invasion-of-ukraine.
6. Daniel, Will. “’This Has Never Happened before in the History of the Nickel Market’.”Fortune, Fortune, 9 Mar. 2022, https://fortune.com/2022/03/09/nickel-trading-halted-price-doubles-russiaukraine-invasion-short-squeeze/.
7. Vanamali, Krishna Veera. “From Biscuits to Fuel, Ukraine War Driving up Prices of Everything.”Business Standard, Business-Standard, 14 Mar. 2022, https://www.business-standard.com/podcast/economy-policy/from-biscuits-to-fuel-ukraine-war-driving-up-prices-of-everything-122031400095_1.html.