Stock Markets Fall as War Talk and Inflation Unnerve Investors

Stock markets have started the week on the back foot after Wall Street’s sell off on Friday.

Adding to bearish sentiment around inflation and interest rates are rising fears over an imminent war in Ukraine.

With both Western and Russian diplomats leaving Kyiv, and talks failing to wind down tensions, the possibility of a Russian invasion of Ukraine has also helped to push oil prices even higher,  with crude nearing $100.

West Texas Intermediate crude is at $93.19 and Brent at one stage this morning touched $96.

Also, in Europe benchmark gas prices jumped nearly 15% today.

Germany’s Dax is the worst performer of the major indices in Europe, dropping 3.3% to 14,913.

The UK’s commodities-heavy FTSE 100 is 1.8% lower at 7524. On the equity futures markets, the S&P 500 is slipping 0.83% at the time of writing and the Dow 0.72%.

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UK CPI inflation data for January is out on Wednesday. Economists expect inflation to be unchanged at 5.4%, so anything higher than that will add to hawkishness at the Bank of England.

Safe haven buyers out in force

Safe haven buying is evidenced in the gold price up 0.80% at 1,856, while government yields are coming off recent year highs. Investors are rushing to buy government debt, thereby pushing up prices and pressuring yields lower, as they move in an inverse direction to prices.

UK Gilt yields on the 10-year are down 4.2% to 1.4795 and US 10-year Treasuries off 1.69% at 1.918.

Despite attempts by the US to help Europe secure gas supplies from non-Russian sources, there is rising concern about how a war in Ukraine would make much worse the energy crisis already impacting the continent. Around a third of the exports to Europe from Russia go through Ukraine.

Natural gas prices in Europe rose €88/megawatt hour and German month-forward electricity contract advanced 11% to €177/megawatt hour, according to data cited by Bloomberg.

Energy prices further feeding inflation – headache for central banks

And it is not just gas prices that are ballooning. Brent crude, as noted, is trading 1.8%, which follows a  4.7% surge at the end of last week. Coal prices are also up in European markets, by 1.4% to $115.50/metric ton.

Energy prices are already feeding through to general inflation, so yet more increases in gas and oil prices will worry central bankers trying to tame inflation, which many are expecting to peak by April.

That seems increasingly unlikely now, especially with supply disruption continuing and prices of agricultural commodities such as wheat set for a huge spike – Ukraine is one of the world’s largest exporters of wheat.

Base metal shortages are also pouring fire on inflationary pressures.

German chancellor Olaf Scholz is in Kyiv and Moscow today in what looks like a last ditch effort to avoid war, even though government and media in Russia complain that the West is building unwarranted hype about a war. Meanwhile the Ukrainian president is accusing its Western partners of spreading panic in the country.

Market participants will be watching closely the diplomatic manoeuvres as well as the military ones over the coming days. markets will remain volatile.

In our end of year ahead forecast, EconomyWatch predicted that geopolitical tensions would be a major concern for investors in 2022, and so that has turned out to be.

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