Macro Macro Macro

Macro Digest: Russia invades Ukraine - Where to focus our attention next

Macro
Steen Jakobsen

Chief Investment Officer

Summary:  Russia has invaded Ukraine, with immediate severe fallout for global markets. The situation is fluid and virtually anything can happen, but here I take a stab at what may happen next, which for global investors will hinge especially on the shape of new sanctions and the scale of their impact.


Just before 6 am Moscow time Putin went on TV (in what looked liked a taped speech) and notified world that a “special operation” was taking place in the Donbass region of Ukraine. In turn, Ukraine said that Russia had launched a full scale invasion of the country, with missile attacks on military installations in multiple cities and reports of troop movements up from Crimea and down from Belarus.

Source: Financial Times

A quick screen grab of the immediate scale of the reaction, as Brent oil trades well above $100/barrel, equities are off sharply, and the Russian ruble has dropped sharply.

Source: Bloomberg

Now for some quick comments on what may happen next:

  • NATO response: This latest escalation could see Article 4 invoked by NATO, which means alliance needs to mobilize and may increase its military presence in countries on Russia’s and Ukraine’s borders. We don’t dare guess where the risks lie here, but it heightens danger.

  • The severity of sanctions The long list of sanctions that Western countries, whether from the US or the EU, have tried to box in Russia in various ways, but never targeted the actual flow or price of commodities, particularly oil and gas. That will now change: and the Western powers will have to hurt themselves if they are to hurt Russia as new sanctions are likely to affect the flow of commodities itself and possibly Russia’s financial system and its access to the world. This will in itself lead to much higher inflation both in the short and medium term. Russia exports millions of tons of oil monthly to Western destinations and vast quantities of natural gas exports. The slowing of natural gas flows over the winter has already wreaked considerable havoc, but could get worse still if flows are slowed further. Of major EU countries, gas shortages would impact Germany and Italy the hardest. The EU political situation bears watching as the EU has been far too passive -  Europe will need to move forcefully now to avoid the fallout of an energy emergency. This is an extreme situation. There is the possibility of 110-125 Brent oil prices or higher inside next week, if the conflict deepens and escalates in the wake of sanctions.

  • Risk to corporate profits. A new spike in energy costs is a significant risk economic activity and with that, for corporate profits. Its not time to be panic in stock market, but the Fed had already pivoted hard on the need to tighten monetary policy in November and doesn’t have much to bring to the table with its tools to affect the reality of short supply, broken supply lines and uncertainty. This hurts sentiment and especially earnings. This means more downside is likely. Defensive areas in equities are likely to be: energy, commodities and defense.

  • Bonds will see short-term lower yield but will probably not offer usual safe haven as this conflict comes with higher inflation as by product.

  • March FOMC meeting: only a reaction function to the scale of market damage: i.e., Fed still priced as nearly certain to hike in March, but only doesn’t do so if markets are out of control.

  • Personal sanctions against Putin? Within the sanctions, we will watch whether Putin is personally sanctioned, a move that is unprecedented and some would argue, a direct attack on sovereign state. (according to Russian media).

  • What is peak impact? This is particularly tough to gauge, but in modern history, new shock negative “impulses” deliver about a 5% downside risk in equities on average. Meaning we have done a lot of the damage “relative to this baseline” already this morning, but remember this is unique situation. The shock comes in a world already with extremely high inflation pre-conflict (Germany PPI was 25% year-on-year in January!) and few paths from here lead to lower inflation.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Support Centre
For existing clients, please click here to request support via the Support Centre.

Have a question about our products, platforms or services? Visit the Support Centre to find answers for our most frequently asked questions. If you are still unable to locate an answer to your question, you will also find contact details for your local Saxo office to speak with a representative.

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.