The impact of the Russia-Ukraine conflict on global markets
Dow plunges nearly 600 points as crude oil tumbles 11%
On March 2, US stocks fell on the first day of March as oil prices soared. The Dow fell 597.65 points to close at 33,294.95 points, down by 1.76%; the S&P 500 fell 1.55% to close at 4,306.26 points; and the Nasdaq fell 1.59% to close at 13,532.46 points. The stock market decline came as satellite cameras caught a convoy of Russian military vehicles apparently on their way to the Ukrainian capital, Kiev. A U.S. Defense Department official said Tuesday that 80 percent of the Russian troops that massed at the Ukrainian border last month have now entered Ukraine. on March 1 local time, Ukrainian President Zelensky said in a media interview that he was willing to hold a direct dialogue with Russian President Vladimir Putin. Subsequently, Russian presidential press secretary Peskov said it was too early to talk about a meeting between Russian President Vladimir Putin and Ukrainian President Zelensky.
The situation in Russia and Ukraine has pushed up energy prices. US WTI crude oil futures prices rose 11% on Tuesday, topping $106 per barrel to reach their highest level in seven years. Wheat prices also rose sharply on Tuesday, with higher commodity prices fueling inflation concerns in the US and Europe.
US Treasury yields were generally lower, with the benchmark 10-year Treasury note falling below the 1.7% level in Tuesday’s trading. Yields move in the opposite direction to prices, so the fall in yields represents a rush by investors to buy safe-haven bonds amid stock market turmoil.
The VanEck Russia ETF fell 30 per cent on Monday and another 19 per cent on Tuesday amid a break in the Russian stock market.
Wall Street has quietly lowered its expectations for Fed action due to the Russia-Ukraine situation. The market had expected the Fed to raise rates up to seven times in 2022, while recent pricing suggests only five, which would equate to an increase in the Fed’s benchmark short-term borrowing rate of about 125 basis points, or a range of 1.25%-1.5%.
How will the Russia-Ukraine conflict affect global markets?
Global risk aversion rose last week as the conflict between Russia and Ukraine escalated. Crude oil, the US dollar and gold rose, while global stock markets generally fell. The Fed will be under pressure from both inflation and risk aversion. The probability of a 50bp rate hike at the March FOMC meeting continued to fall back to the current 17.2%, with more and more investors betting on a 25bp rate hike in March rather than a 50bp hike. Compared to the Federal Reserve, the constraints on the ECB will likely be more pronounced, with expectations of a rate hike continuing to cool. The impact of geopolitics may become an additional exogenous variable for the Fed, the Fed’s decision may still need to pay attention to the changes in two clues. The first is the impact on inflation of the magnitude of the rise in oil prices and its duration at high plateaus, and the second is the magnitude of asset price adjustments and their possible additional negative drag on demand.
The Federal Reserve opened interest rate hikes, what is the impact on China?
Reviewing the last round of Fed rate hikes, the country saw exchange rate depreciation, capital outflows, foreign exchange reserves decline and so on. Since the beginning of 2022, Fed rate hike expectations have continued to rise, but the current round of Fed rate hike expectations rendition phase, RMB exchange rate, capital flows and foreign exchange reserves remain solid. From the viewpoint of capital flows, export resilience + capital inflows, the balance of payments fundamentals remains solid. From the exchange rate mechanism, the exchange rate mechanism is gradually flexible, and foreign exchange reserves play more of a moat function. From the policy side, foreign exchange management has been continuously improved, and the ability to prevent volatility and withstand shocks has been enhanced. From the perspective of expectations, the current exchange rate is expected to deviate less, volatility has decreased, and the stability of market sentiment has increased. There is pressure on capital outflows but no shocks will be formed. Domestic monetary policy independence is increasing. If the Federal Reserve rate hike causes a decline in U.S. stocks, one needs to be wary of the impact on the A-share market through sentiment contagion.
Russian commercial banks raise ruble deposit rates
On 1 March, Russia’s major commercial banks increased their respective ruble deposit rates. Sberbank and Foreign Trade Bank increased their ruble deposit rates to 18%, Gazprom Bank to 18.2% and Zenit Bank to 20%. Earlier, on 28 February, the Bank of Russia announced an increase in the benchmark interest rate to 20%. There are still some foreign banks and small commercial banks that have not announced changes in interest rates.
By Sherry Song
