What could happen in an escalation between Russia and Ukraine on the global economy?

There’s no doubt that investors will be braced for torrid trading, particularly since the Russian President, Vladimir Putin, has been upping the ante in a growing crisis.

The situation wasn’t helped when Mr Putin recognised two breakaway regions in eastern Ukraine, Luhansk and Donetsk, as independent entities.

It’s these tensions that are rattling global markets and are wiping billions of dollars off the value of Ukrainian and Russian assets.

Moscow’s stocks plunged to their lowest level

But it’s not just the markets in the West that are worried; the rouble lost 3.3% while Moscow’s stocks plunged to their lowest level seen for more than a year after Mr Putin’s decision was announced.

Among those warning about stock-market turmoil are analysts at the Commonwealth Bank of Australia who say that Putin’s decision would exacerbate already high tensions.

They added: “Financial markets now wait for a response from the United States and Europe.”

That response will probably be in the shape of new, tough sanctions.

Analysts say that the measures could include banning US, UK and EU investment funds from holding Russian government bonds.

To put that into perspective, at the end of 2021, overseas investors held more than $43 billion of Russia’s rouble-denominated bonds, known as OFZs.

There are also fears that Russia’s banks may be cut from the SWIFT banking system.

MOEX in comparison to DOW JONES Index

Impact on global market confidence

Financial analysts are also warning that there could be an impact on global market confidence which is also struggling with inflation and fast-rising borrowing costs.

The futures markets are predicted to record falls but there will be a demand for traditional safe assets which has seen US Treasuries rally.

The UBS’ head of emerging markets strategy, Manik Narain, said: “This step (By Putin) increases uncertainty and creates further downside risk for global risk assets.”

His pessimism was shared by the managing partner at Florida’s Case Capital Advisers, Ken Polcari, who said: “We are going to see a negative reaction.”

He added that he was expecting the S&P 500’s ‘low point to be tested’.

Largest stockpiles of international FX reserves

It’s also worth appreciating that Russia holds one of the largest stockpiles of international FX reserves in the world at $630 billion.

However, the cost of insuring the country’s sovereign debt against default has also rocketed since 2016.

One of the issues is that Russia supplies 10% of the world’s gas and oil needs, and in Europe, that figure is 40%.

This has led to Brent Crude futures rising above $96 at one point, its highest price in nearly eight years.

The shares in travel firms have also been badly hit at the prospect of war in Ukraine, and even the shares of BP, despite the rise in oil prices, fell because it has a stake in the Russian energy giant, Rosneft.

WTI Crude Oil
WTI Crude Oil

‘Financial carnage’ will not last

However, not every analyst or commentator is believing the worst with the Spectators’ Matthew Lynn predicting that ‘financial carnage’ will not last should Russian tanks enter Ukraine.

He says that while this will be Europe’s most serious conflict since World War II, geopolitical events ‘rarely make a difference to the markets for more than a few days’.

He points to the Suez crisis, JFK’s assassination and 9-11 to make his point.

There is another issue, the FT’s Darren Dodd, warns and that’s the anxiety of current market conditions.

He says that in commodities, the tensions in Ukraine have worsened what has been a worrying inflationary ‘crunch’.

Part of the problem is that gas prices in Europe have been pushed up high because of storage and supply flow issues, and he warns that sanctions could have a severe effect on the price of materials.

Less than a week’s supply of copper stock

Of these raw material prices, Mr Dodd says that supplies are already badly depleted and that major exchanges have less than a week’s supply of copper stock.

The supply of aluminium is also low, and its price is at a 13-year high.

An analyst at Goldman Sachs warned: “This is an extreme inventory environment,” adding it is ‘unprecedented’.

The Wall Street Journal’s John Sindreu has written that the impact of war in Ukraine on investment portfolios will be hard to discern.

He adds that a conflict will certainly stoke rampant inflation.

Indeed, that’s the view of Simon MacAdam of Capital Economics 

He says that a Russian invasion, or a serious ratcheting up of sanctions, could see two percentage points being added to inflation figures in the West.

Investors are seeking out traditional safe havens

With jittery markets, investors are seeking out traditional safe havens, including the US dollar and gold – which has hit a 13-month high. 

Investors are also rushing back to bonds, even with the risk of increasing oil prices and inflation.

Reuters highlights that one indicator of geopolitical risk for the Eurozone is the exchange rate for the euro/Swiss franc.

It is normally seen as a safe haven by investors and the currency has been at its strongest since May 2015.

Grains and wheat futures

Sanctions would also affect grains and wheat futures with Russia ranking as the world’s top exporter of wheat, while Ukraine is the world’s third-largest exporter of corn, and the fourth for wheat.

Analysts are also predicting that natural gas exports to Western Europe from Russia will also be reduced significantly should sanctions be introduced.

This will, they predict, see gas prices returning to their previous highest levels.

Things also look bleak for currency traders and even without sanctions, the Russian and Ukrainian currencies have suffered.

The worst performing currency in emerging markets in the year to date is the Ukrainian hryvnia, while the rouble is the fifth-worst.

ING’s global head of markets, Chris Turner, said that the current potential conflict presents ‘substantial uncertainty’ for foreign currency markets.

Whether it is currency or commodity uncertainty, or jittery stock markets, investors and analysts alike will be watching carefully the news for reports of increasing tensions or Russian invasion.

Wall Street Ends 2021 With Existential Angst and Big Bonuses

While hosting retired partners at a dinner party in November, the Goldman Sachs Group Inc. Chief Executive Officer, David Solomon, proudly said his firm will feature among the most profitable large public companies this year. 

However, veteran banker Geoffrey T Boisi is surprised by how the excitement has taken a low-key. 

“I don’t know if malaise is the right word — it’s this uncomfortable feeling,” said Boisi 

Boisi left Goldman Sachs back in the 1990s to join JPMorgan Chase & Co as the vice-chairman. Later, he founded the Beacon group and Roundtable Investment Partners, where he is serving as the chairman and Chief Executive officer.  

In winding his remark, Boisi said, “People are more unsettled and ill at ease.”

The 74-year-old banker wasn’t simply alluding to the mood at the exquisite Manhattan’s Hudson Yards arts center that evening. 

Those who have enjoyed the past Wall Street booms agree that, in a sense, this one doesn’t evoke the best feelings. 

The wealth pumped in by deal makers and elite traders is possibly overtaken by the quick riches being flaunted by cryptocurrency enthusiasts, meme stocks, and fintech whizzes. 

There is also a sense of awareness that the financial sector is enjoying the benefits of the turmoil created by Covid -19 stimulus efforts and a bubble of market excitement that will fade away soon. 

J. Christopher Flowers, a prominent investor and former head of Goldman’s financial institution’s group, puts it this way.

Wall Street knows much of its windfall is coming from “speculative nonsense.” Take, for example, the glut of special purpose acquisition companies — or SPACs — making executives and some bankers rich as they rush to market. They have “a large element of baloney,” he said 

Banking’s Big Bonuses

During James Gorman’s five-year tenure at Morgan Stanley, the firm averaged close to US $3 billion of profit annually. But in this year’s first quarter alone, they made a whopping US $ 4 billion. 

JPMorgan, which hadn’t made US$25 billion before 2018, is expecting US $45 billion, while Goldman Sachs smashed its annual profit record around labor day.  

Several bankers, particularly those handling mergers and acquisitions, expect their bonuses to soar. 

Breaking Records

Clearly, Wall Street banks are breaking their 10-year-old revenue and profit records. However, in this race, you are not rated by what you have but by how much more you have than your competitors. 

During Wall Street’s pre-crisis boom, Facebook Inc. and Tesla Inc. were barely up and running, but right now, these companies’ founders alone are worth more than Citigroup Inc. 

Remember, this was once US’s most valuable bank. 

The packages that Goldman and JPMorgan gave their chief executives may pale compared to what Apollo Global Management Inc. and KKR & Co. will roll out for their bosses. 

Even Amateurs in meme stocks and crypto have shown off the Lamborghinis they have acquired from their new fortunes. 

Mark Gorton, chairman of high-frequency trading firm Tower Research Capital says there is always someone doing better than you and everyone measures their success against those people’s wealth.

5G interference worries Airbus and Boeing

The duo’s intervention adds pressure on US regulators in a protracted row pitting airlines and mobile phone companies over the roll-out of the fast yet controversial 5G mobile broadband technology in the United States of America.

They say that joint and concerted efforts are underway to evaluate and establish the extent to which 5G signals could tamper with the flight equipment.

In a co-signed letter to the US transport secretary, Pete Buttigieg, the Boeing chief executive, David Calhoun, and the Airbus Americas boss Jeff Knittel detailed the US aviation stakeholders’ mutual concern over implementing the 5G networks in the United States.

In a statement to the AFP news agency, an Airbus spokesperson said,

“Boeing and Airbus have been working closely with all the US aviation industry players to understand better how the 5G mobile broadband technology interferes with radio altimeters.”

In a separate statement, Boeing added that the aviation industry is keen on thoroughly assessing and resolving the potential 5G clash with radio altimeters.

“We are working together with aviation authorities, airlines, industry groups, and government leaders to ensure that aviation systems guarantee aircraft safety around the world” they said.

Giant telecom operators AT&T and Verizon were scheduled to launch their 3.7-3.8 GHz frequency bands on December 5th, 2021, after acquiring multi-billion dollar licenses in February.

However, the launch was postponed in November following intervention by the aviation industry’s regulator. The body expressed its concerns and fears over the 5G signal’s potential interference with the aeroplane’s altimeters.

On its part, the Federal Aviation Administration (The largest transportation agency of the US government) has asked for more information about aircraft gadgets that can leverage similar frequencies as 5G.

At the same time, the Federal Aviation Administration has developed directives that seek to limit the application of radio altimeters in specific situations. Apparently, this move has caused fears among airlines over the possible costs.

In November, AT&T and Verizon wrote to the Federal Communication Commission declaring their plans to roll out 5G networks in January 2022.

So far, the 5G network providers maintain that the upgrade is safe, and, airlines together with all other potential users, have nothing to fear or worry about.

However, they pledged to take additional cautionary measures, at least, until July 2022 as the Federal Aviation Administration completes its investigations.

In February 2021, the French authorities recommended switching off 5G mobiles phones on planes owing to the raging conflict between aircraft software and 5G networks.

The French civil aviation authority took action, saying that interference from a frequency signal to the altimeter (whether similar or stronger in power) would lead to fatal errors during landing.

Flight disruptions are looming even as airlines struggle back to their feet after the ravaging coronavirus pandemic that led to losses in billions of dollars last year.

Airline carriers are still contending with staff shortages and unruly passenger episodes meaning the industry is least prepared to shoulder the 5G clash, which might cost over 2.1 billion dollars in flight disruptions.

Accordingly, more aviation officials and airline executives are adding their voices to these concerns warning of massive flight delays in blizzards, poor visibility, cancellations, and diversions once the new 5G wireless service launches in January 2022.