Analysis: Gold bid, stocks dumped further as war in Ukraine upends markets

Russia’s invasion of Ukraine saw investors scrambling for the safety of gold and the protection of inflation hedges as weeks of brinkmanship came to a head on Thursday.

While market participants had been bracing for some form of aggression on Russia’s part, Thursday’s attack that brought explosions even in the Ukrainian capital of Kyiv, and across the country, made the war real for market participants. read more

Trader playbooks seemed to change from one that was built around the possibility of a diplomatic resolution to the crisis, to what had at one point been a tail-risk, or extreme, scenario.

“It looks pretty clear that they are moving toward Kyiv, which was always one of the worst case scenarios, because we now have a long night ahead of us trying to understand how bad this gets, and what sanctions get put up,” said Chris Weston, head of research at brokerage Pepperstone in Melbourne.

“There are no buyers here for risk, and there are a lot of sellers out there, so this market is getting hit very hard.”

Gold prices jumped to their highest in more than a year as stock markets and futures on their indexes fell. Oil prices surged past $100 a barrel for the first time since September 2014.

Nasdaq futures fell sharply, and suggested the U.S. tech-heavy index was on track to confirm being in a bear market – down 20% from its recent high.

“Whether there will be a full-blown war or not, the simple strategy is to bet on a spike in inflation,” said Yuan Yuwei, a Chinese hedge fund manager at Water Wisdom Asset Management.

“That means buying oil and agricultural products, and shorting consumer shares and U.S. growth stocks.”

Wheat futures jumped to their highest since July 2012, soybean futures gained to a nine-year peak, and corn futures hit an eight-month high.

Russia and Ukraine account for around 29% of global wheat exports, 19% of world corn supplies, and 80% of world sunflower oil exports. Traders worried that any military engagement could impact crop movement and trigger a mass scramble by importers to replace supplies from the Black Sea region. read more

MORE SANCTIONS

Still, the next obvious step for most investors seemed to hinge on what further economic and financial sanctions will follow the preliminary ones the United States, the European Union, Britain and Japan have announced. read more

Shaun Wu, a Hong Kong based partner at law firm Paul Hastings, said the scope of those sanctions could be broadened, and could extend to not just non-government Russian companies but also parties in other countries trading with Russia.

Amid the coronavirus pandemic, rampant inflation and the removal of monetary stimulus, the impact could be significant.

“This will scatter global investor confidence,” said Karen Jorritsma, head of equities at RBC Capital Markets in Sydney. “You have world economies already going through the transition away from stimulus, now the question of what happens to global growth as a result of this.”

Among those looking for opportunities in a crisis is a senior portfolio manager at a U.S-based asset manager, who reckons Ukraine’s beaten down bonds are a bargain “unless Putin fully occupies Ukraine.”

“We’re betting that Putin will not fully occupy Ukraine, even though there would be fighting and war,” said the portfolio manager, who asked not to be identified because of the sensitivity of the topic. “A war is bad for the economy, but what’s important in this situation is that Uncle Sam will support them as much as they need. And also Western Europe, and IMF.”

It’s a risky bet. Ukraine’s 2040 GDP-linked dollar bond has fallen to levels last seen in 2017, while the premium demanded by investors to hold Ukrainian debt (.JPMEGDUKRR) has widened substantially.

Research firm CreditSights advised caution. “In the near term, it is difficult to see any obvious options for near-term de-escalation and we therefore move to a ‘Hold’ recommendation on Ukraine’s dollar bonds,” it said in a note.

“The current lack of liquidity and volatile price action means we are wary of chasing the price down, so we are avoiding moving to a sell recommendation. However, clients maintaining their holdings should expect plenty of volatility and a high level of risk.”

Reporting by Alun John and Xie Yu in Hong Kong and Samuel Shen in Shanghai; Writing by Vidya Ranganathan; Editing by Lincoln Feast.