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Risk assets slip again on harsher Russian sanctions

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By Hussein Sayed, Chief Market Strategist at Exinity

US and European equity futures fell dramatically in early Asian trading hours on Monday, along with bond yields, while the dollar and commodity prices surged as investors looked for havens to hedge their portfolios, following the latest developments in the Ukraine crisis.

The Russian rouble plunged by almost 30% to trade at a new record low of 106 roubles per dollar after western countries blocked a list of Russian banks from the SWIFT global payment system. Fears that oil supplies could be disrupted sent Brent crude 5% higher and European gas futures rose by more than 60%.

The decision to cut Russia from the global payment system could possibly halt gas supplies to Europe and lead to dangerous economic consequences on the continent and the rest of the world.

Investors are still trying to figure out what happens next and act accordingly. Dip buyers emerged on Thursday and Friday, just one day after the large-scale military attack, but now they are seeking shelter again after they realised that this war is not a one-day event and outcomes are hard to predict.

The world has not seen a military confrontation on such a scale since World War II, and no one seems to know how this will end. It’s not just the direct effects that worry investors such as the short-term impact on commodity prices, but the longer-term consequences are of even greater importance.

Monetary and fiscal policy makers across the western world have already exhausted their tools in response to the coronavirus pandemic. Now they are facing a new crisis with bloated fiscal deficits and near zero interest rates.

Limited response

So, any response from governments will be limited in supporting the economy or financial markets in case of turmoil and investors will be left on their own.

The Federal Reserve, ECB and other major central banks are already behind the curve with inflation levels at multi-decade highs.

The current geopolitical crisis will only add further upward pressure on prices, and central banks are left with no option but to tighten policy. So, those counting on monetary policy makers to intervene in case of a meltdown will be disappointed.

The global economy may not be headed towards a recession, but the chances of one have increased over the past few days. The trajectory of the ongoing conflict will be an important factor to investors as it will either encourage dip buyers to emerge or lead to further steep selloffs.

Allocation to cash needs to be high in current circumstances. Even companies with very solid financials will be highly correlated to the overall market.

A defensive approach is needed as volatility continues to spike, but with such volatility comes long term investment opportunities, and hence cash is vital.

For information, disclaimer and risk warning note, visit: https://exinity.com/en-ae

Exinity ME Ltd, a company registered under the Laws of the Abu Dhabi Global Market (ADGM), is authorised and regulated by the Financial Services Regulatory Authority (FSRA)