Russia invasion could have a big impact on global markets

LONDON Reuters - A potential invasion of Ukraine by neighbouring Russia would be felt across a number of markets, including wheat and energy prices and the region's sovereign dollar bonds to safe have assets.

Below are four charts showing where a potential escalation of tensions could be felt across global markets:

Inflation at multi-decade highs and the possibility of interest rate rises have made for a bad month for bond markets, but an outright Russia-Ukraine conflict could change that.

The two-year U.S. Treasury yields have seen the biggest monthly jump since 2016 and 10 year rates appeared to be headed for the key 2% level. For the first time since 2019 in Germany, 10 year yields rose above 0%.

A major risk event usually sees investors rushing back to bonds, which represent the safest assets on planet, and this time may not be different, even if a Russian invasion of Ukraine risks further fanning oil prices and therefore inflation.

If the Ukraine story were to go wrong, there would be a significant bid for Treasuries, and this idea of the 10 year getting to 2% at ING, said Padhraic Garvey, regional head of research, Americas at ING.

Other safe-havens include gold, already at two-month peaks as well as the yen.

Any interruption to the flow of grain out of the Black Sea region is likely to cause a major impact on food inflation and add to the economic damage caused by the COVID 19 pandemic.

Four major exporters - Ukraine, Russia, Kazakhstan and Romania - ship grain from ports in the Black Sea which could face disruptions from any military action or sanctions.

According to International Grains Council data, Ukraine is projected to be the third largest exporter of corn in the 2021-22 season and fourth largest exporter of wheat. Russia is the world's top wheat exporter.

In the recent months, geopolitical risks have risen in the Black Sea, which could influence wheat prices ahead, said Dominic Schnider, strategist at UBS.

If tensions turn into conflict, energy markets are going to be hit. Europe relies on Russia for around 35% of its natural gas, mostly coming through pipelines that cross Belarus and Poland to Germany, Nord Stream 1 going directly to Germany and others through Ukraine.

In 2020 volumes of gas from Russia to Europe fell after a lock down suppressed demand and did not recover fully last year when consumption surged, helping to send prices to record highs.

As part of possible sanctions against Russia in the case of Ukraine invasion, Germany has said it could stop the new Nord Stream 2 gas pipeline from Russia, which was expected to increase gas imports to the bloc, but also underlines Europe's energy dependence on Moscow.

In the event of sanctions and gas prices revisit Q 4 levels, SEB commodities analyst Bjarne Schieldrop said that natural gas exports from Russia to Western Europe would be significantly reduced through Ukraine and Belarus.

The oil markets could also be affected. JPMorgan said that the tensions risked a material spike in oil prices and that a rise to $150 a barrel would reduce global GDP growth to just 0.9% in the first half of the year, while more than doubling inflation to 7.2%.

Russian and Ukrainian assets will be at the forefront of any markets falling out of potential military action.

Both countries' dollar bonds have underperformed their peers in recent months because investors have trimmed exposure due to escalating tensions between Washington and its allies and Moscow.

Russia's standing on capital markets shrunk in recent years due to sanctions and geopolitical tensions, which has cushioned any threat of contagion through the channels of Ukraine's fixed income markets.

Russia's rouble and Ukraine's hryvnia have suffered, making them the worst performing currency in the emerging markets universe this year.

Chris Turner, global head of markets at ING, said that geopolitics on the Ukraine-Russian border presented substantial uncertainties to foreign currency markets.

The events of late 2014 remind us of the liquidity gaps and U.S. dollar hoarding that led to a significant drop in the rouble at the time, said Turner.