(Market story) Can Ukraine's offensive end the bear market?

Could the dynamic counteroffensive of the Ukrainian troops which sparked optimism on European stock exchanges be the first sign of sentiment shift and the beginning of a new boom? Or should we be patient and maintain a solid doze of healthy skepticism?

A breath of optimism from the east

Over the past few weeks, we have witnessed a protracted trench war between Ukraine and Russia. Neither side of the conflict could gain a significant advantage over the opponent, which in turn resulted in stagnation on the main European stock exchanges. Moreover, subsequent attempts of energy blackmail by Russia led to energy commodity price shocks, especially gas, which further intensified investors' concerns about the energy crisis and recession in Germany, which is the economic engine of Europe. No wonder then that the optimistic reports from the front caused the euphoria among investors driven by the hope that the armed conflict may end before winter comes. Winter, i.e. the heating season, which enables Putin to use even wider energy blackmail against Europe in order to lift economic sanctions. The stock market, unfortunately, tends to overreact, both euphoric and depressive. However, it is worth recalling what exactly, from a military point of view, caused such euphoria at the beginning of the week.

The turning point of the war?

Last weekend brought a significant breath of optimism on European stock exchanges and an opportunity to normalize the energy situation in Europe. Ukrainian troops carried out a successful counter-offensive near Kharkiv, breaking through some 70 km into the Russian lines. According to an assessment by the Institute for the Study of War (ISW), over the past five days, the Ukrainian military has liberated more territory than Russia has occupied since April. A particularly successful counteroffensive took place near Kharkiv, where the Ukrainian army managed to regain significant areas to the north-east of the city. The military situation is presented on the map below.

Source: https://www.bbc.com/news/world-europe-60506682

Who will gain and who will lose at the end of the war?

The war in Ukraine resulted in a supply shock, especially in the energy commodity market, which translated into a drastic increase in gas prices, which in turn contributed to a dynamic increase in energy prices. This led to a production stoppage in some nitrogen fertilizer plants. In addition, the imposition of economic sanctions on Russia meant that the Kremlin first significantly reduced the gas transfer capacity, and then completely stopped the gas transmission to Europe through the Nord Stream 1 gas pipeline. As a result, Germany and other European countries faced an energy crisis, possible energy rationalization and potential recession.. In response, EU members, but also the US and Japan began to focus on the diversification of potential energy sources, looking more favorably towards nuclear energy, which remained somewhat controversial in the eyes of the public, especially after the Fukushima power plant disaster. This, in turn, led to higher uranium prices and pushed increased valuation of  companies from this sector. The supply shock also triggered a temporary boom in stocks of companies related to the mining sector and the production of mining machinery. It seems that these sectors are most exposed to profit taking should the situation between Ukraine and Russia stabilize. On the other hand, the biggest beneficiaries of a possible peace may be primarily the banking sector, which is particularly sensitive to any global turmoil, together with mining and agricultural companies operating in Ukraine. Moreover, normalization of energy commodity prices may reduce inflationary pressure, which in turn may enable central banks to start a cycle of interest rate cuts, which may constitute a significant growth impulse for European stock indices.

A spoonful of tar in a barrel of honey

Despite the increasing number of media statements that herald the imminent end of the armed conflict in Ukraine, it seems that a dose of healthy skepticism should still be maintained in this regard. Significant progress in the Ukrainian counter-offensive may cause a wounded bear effect on the Russian side, which, being cornered, may be even more unpredictable. This, in turn, is a serious risk factor and, if it materializes, may contribute to a sharp sell-off of European stocks.In a word, we all would like the war to end as soon as possible, but looking objectively, the end of this intense armed conflict is still far away.