A potential war in Ukraine between Russia and Nato powers could be felt across a number of markets, from wheat, energy and sovereign dollar prices in the region to safe-haven assets.
Safe Havens: Gold and Yen
Multi-decade highs Inflation and impending hikes in interest rates have led to a bad month for bond markets, but an outright Russia-Ukrainian conflict could change that.
US 2-year Treasury yields saw their biggest monthly jump since 2016, and 10-year interest rates appeared to be headed toward the key 2% level. In Germany, 10-year bond yields rose above 0% for the first time since 2019.
One major risk event usually sees investors rush into bonds, which are the safest assets on the planet, and this time may not be different, even if the Russian invasion of Ukraine risks further fueling oil prices — and thus inflation.
Padhraic Garvey, regional head of research at ING said, “if the Ukraine story gets worse, there will be a very large supply of Treasuries, and the idea of 10 years will be delayed to get to 2%.”
Other safe-havens include gold, already at two-month peaks as well as the yen. While bitcoin and other crypto currencies observe a steep nosedive due to the conflict.
Gas, Oil (Nord Stream 1,2)
Energy markets are likely to be affected if tensions turn into conflict. Europe depends on Russia for about 35% of its natural gas, most of which comes through pipelines that cross Belarus and Poland to Germany, Nord Stream 1 goes directly to Germany, and others through Ukraine.
In 2020, gas from Russia to Europe fell, helping to send prices to record highs.
Germany said it may halt a new Nord Stream 2 gas pipeline from Russia as part of potential sanctions in the event of Russia’s invasion of Ukraine.
JPMorgan said the tensions threaten to trigger a “measurable rise” in oil prices and noted that a rise to $150 a barrel would reduce global GDP growth to just 0.9% annually in the first half of the year, while inflation more than double to 7.2%.
Any interruption in the flow of grain from the Black Sea region is likely to have a significant impact on prices and add more fuel to food inflation at a time when affordability is a major concern worldwide after the economic damage caused by the COVID-19 pandemic.
Ukraine, Russia, and Kazakhstan are three major exporters of wheat, and shipments could face disruptions due to any military action in the black sea.
According to data from the International Grain Council, Ukraine is the world’s third largest exporter of corn in the 2021/22 season and the fourth largest exporter of wheat.
Dominic Schnider, strategist at UBS said that ‘geopolitical risks have risen in recent months in the Black Sea region, which could influence wheat prices ahead’.
Russian and Ukrainian’s dollar bonds have underperformed in recent months as investors scaled back their exposure amid escalating tensions between Washington and its allies and Moscow.
Russia’s overall standing in the capital markets has shrunk in recent years amid sanctions and geopolitical tensions, somewhat mitigating any threat of contagion.
Both Ukraine’s hryvnia , and the Russian rouble have suffered, making them the worst performing currencies so far this year.
“The 2014 events remind us of the liquidity gaps and hoarding of the US dollar that led to a significant depreciation of the ruble at that time,” said Chris Turner, head of global markets at ING.