The world wakes to fears of a new cold war

Traders in Europe woke up to the news Russia had invaded the Ukraine and stock markets reacted as the price of oil rose over 100 dollars a barrel. Considering Russia’s trade with Germany is less than 2% of their GDP one could consider the reaction in Europe was excessive.

Wall Street’s response was initially to follow Europe but in a less dramatic way. By the close of trading in New York all engines had been reversed as the oil price was back below 100 dollars and this encouraged a late rally in US stocks.

It would appear clear that the decision by governments to introduce sanctions on Russia, far from deterring Putin, left him a little option in his mind than to invade.  Aside from the European equity markets, the reaction from various other asset classes was a  little more muted.  Initially, yields fell as investors ran for safe assets, ten years US treasury yields back below 1.9%, by the close ten-year yields were back to where they started the day. Gold, up modestly this week, was likewise little changed by the end of the day. The dollar rose and again by the close of play was little changed.

Materials and industrials were the hardest hit sectors as theirs are the ones most likely to be hit by any impact this will have to growth. Technology shares fared better as one assumes any disruptions to life means greater use of technology. German stocks were particularly hard hit, despite Germany’s trade with Russia accounting for about 2% of their GDP.

What will happen now? Buy on the sound of bullets was the old adage and they may well prove to be true 6 months down the line if one can live the possibility of more volatility. There will be those who want to sell and take the pain away, not realising these are the times of opportunity. At one point the Nasdaq reached bear market territory as the S&P made new lows.

The real issue as we said at the start of this article is oil and what that price does. Higher oil price shocks almost always lead to an economic recession as high oil prices are a direct tax on growth. So the risk of an economic recession has increased. The contra is that although government balance sheets are tapped out, the rhetoric from central banks is likely to turn more dovish.