THE WAR PLAYBOOK: WHAT RUSSIAN-UKRAINE CONFLICT MEANS FOR THE MARKETS

Volatility in the markets as traders seek opportunities and investors eye safe-haven assets amid an escalation in geopolitical tension

To say financial markets have been super-volatile in 2022 would be a massive understatement. The prospects for higher inflation and tightening by the Federal Reserve were joined early on in the year by an imminent invasion of Ukraine by Russia with the current military standoff creating concerns about the potential impact on financial markets.

Since Russia controls 10% of the world’s energy and nearly 50% of the energy consumed in Europe, the conflict does pose risks that could extend beyond the two countries’ borders including higher energy prices and increased financial market volatility.

Impact on markets

An increase in short-term stock market volatility is definite since a Russian military action adds to the general market nervousness that has already been heightened due to inflation and the impending Fed hike.

From a trading standpoint, the biggest impact will likely be the relatively short-term risk to energy prices as the conflict could drive up prices of oil, natural gas, and other commodities at a time when inflation is already a problem. Higher oil and gas prices could further benefit North American energy companies, whose stocks have been among the best performers over the past year.

On Oil, Gold & Commodities

This particular crisis has rippled across commodities markets as well. Gold has been having a bullish 2022 due to its very long history as a safe haven in times like this. At almost $1,900 per ounce, it is now close to its highest level in more than a year, reflecting the universal sentiment of the popular metal as a hedge against inflation.

Crude oil meanwhile is rising thanks to Russia’s status as a major energy supplier. Brent crude, the global benchmark is at $97.32, having earlier reached its highest since September 2014 at $99.50 while WTI crude recently touched a 7-year high as it peaked at $96.

Sanctions on Russia, meanwhile, could have a severe effect on raw materials prices, especially metals–supplies of which are already badly depleted. Major exchanges reportedly have less than one week’s supply of copper stocks while supplies of aluminum (now at a 13-year price high) are also low.

Prices for a number of agricultural commodities jumped too, as Russia and Ukraine together account for about 20% of global corn exports and 25% of wheat exports

Key Takeaways

• The conflict between Russia and Ukraine may contribute to increased short-term market volatility.
• Disruption of Russian energy exports as a result of the conflict could temporarily contribute to rises in global energy prices.
• Sanctions on Russia, meanwhile, could have a severe effect on raw materials prices

What Next?

The current volatility in the markets presents traders an opportunity to earn big in the short term, especially on energy and energy-related instruments.

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