Volatility & Uncertainty: Markets React To Russian Conflict
The Russian invasion of Ukraine has stolen the attention of the global community and temporarily overshadowed other market concerns. As numerous states impose sweeping sanctions against Russia, few, if any, market assets have been left unexposed.
The end of the week saw a dramatic escalation in the Western response to Russian aggression. In particular, the decision to exclude Russian banks from the SWIFT payments system proved that the West had not ruled out the most extreme sanctions.
Over the weekend, images circulated online of Russians queuing at ATMs in anticipation of the SWIFT expulsion. By denying avenues for international exchange, this measure will punish the ruble and feed volatility in the forex market generally.
Moreover, commodities markets (along with associated currencies) remain pressured by supply concerns caused by the conflict. The most obvious example is oil, due to the European dependence on Russian energy sources. But in addition, the disruption to wheat and sunflower oil exports could drive up consumer prices. In terms of metals, palladium prices jumped 6% on Monday thanks to Russia’s domination of production. Meanwhile, traders have flocked to gold for security and produced 6% price growth so far this month.
Trends vs. Temporary Reversals
With all this in mind, last week’s late rallies in US indices came as somewhat of a surprise. To be precise, the Dow Jones enjoyed the largest daily rally since November 2020, whilst the Nasdaq and S&P500 followed behind. However, it may be premature to take this as a sign of a new bullish trend, especially with fresh economic calendar events just around the corner. As DailyFX strategist John Kicklighter writes, ‘such a reactive backdrop can also create serious threats through more prosaic event risks.’
Most investors would agree that is will be hard to divine true trends until the dust settles on the crisis in Eastern Europe. And with the ever-present threats of inflation and tightening of monetary policy, volatility will continue to color the markets.