Global financial markets are on tenterhooks on Tuesday, 22-2-22, after Russian President Vladimir Putin late on Monday recognised the separatists in the east of the Ukraine’s and ordered his troops into Ukraine’s Donetsk and Luhansk regions.
Putin’s aggression means investors now face fresh uncertainty as the ongoing geopolitical developments will have consequences for the economy, for monetary policy, for cohesion among European countries and for transatlantic relations.
Futures markets pointed to lower openings for stock markets in Europe, while oil prices have risen sharply in overnight trading and now are nearing seven-year highs. In US trading S&P 500 futures lost as much as 100 points in the wake of Putin’s announcement and were down 1.5 percent just before the European opening.
Oil prices surged and reached their highest level since September 2014.
Putin’s timing ‘flawless’
Writing for InvestmentOfficer’s Dutch service Fondsnieuws.nl, Han Dieperink, Investment Strategist at Auréus Asset Management, said Putin’s timing is “flawless” as for a first time in history global demand for oil exceeds its supply, and Russian is one of the biggest oil producers in the world.
“Putin now holds the trump card and it is annoying that he knows this,” said Dieperink. “Europe can threaten with economic sanctions but it also knows that voters are not waiting for an oil shock like in 1973 or 1979.”
In a note to investors, Holger Schmieding, Chief Economist at German private bank Berenberg, said that he believes uncertainty will remain as long as the world does not know where Putin will draw his line.
‘Only Putin knows’
“The big uncertainty remains: Only Putin may know whether he will stop here – or whether moving Russian troops openly into Donbas is another step towards an invasion of free Ukraine. If he stops there, sanctions would weaken the Russian economy over time with very limited impact on the advanced world,” Schmieding said.
Markets would return to normal after a while, said Berenberg. But as Putin continues to escalate the situation, it could become “a human tragedy and arguably the worst global security threat since the Cuban missile crisis of 1962”.
The potential economic, financial, and political impact on Europe could come in three stages, said Berenberg.
Significant risk-off move in markets
In the short-term, one to two months, Berenberg sees a further significant risk-off move in markets amid unusual uncertainty followed by a rebound once the outlook becomes clearer. This would be accompanied by a temporary setback to European business and consumer confidence, and a delay in the rebound in economic growth from Omicron setback by up to two months.
A recession would be unlikely, said Berenberg, although there could be a further rise in energy inflation. Europe though has moved “beyond peak vulnerability” as winter is largely over. The European Central Bank and Bank of England would “tread more cautiously at their March meetings, even stronger emphasis on keeping options upon charting the course of stimulus removal.”
In the medium term, three to 12 months, markets would return most to previous trends, the bank said. Economic growth in Europe would get back on track for a strong post-Omicron rebound amid easing supply shortages, while inflation would stays slightly more elevated due to to energy prices.
‘Stronger political cohesion’
Monetary policy then is expected to returns to the path that seemed likely beforehand, with gradually mounting economic problems in Russia due to sanctions, self-isolation and the costs of imperial overstretch. Berenberg said it sees “significantly stronger political cohesion within EU and NATO in response to Russian threat.”
In the long term, beyond one year, Berenberg said it sees “no significant impact on European growth” and a “faster diversification away from Russian oil and gas, more spending on renewables plus nuclear power and on hydrogen for storage of energy”, with more military spending.