First anniversary of Russian invasion. How have markets changed❓

10:18 AM 23 February 2023

This week marks the first anniversary of the Russian invasion of Ukraine. While the conflict was expected to be short-lived, the reality turned out to be quite different. Ukraine defends itself thanks to its determination, support from the West and numerous sanctions imposed on Russia. Meanwhile, the invader is still not willing to retreat despite several defeats. Financial markets, meanwhile, have changed markedly over the last 12 months, although some of the price movements were rather surprising. Price movements on many markets reached several dozen or even several hundred percent in the past few months. However, currently the situation stabilized and earlier moves are being reversed on several markets.

Energy commodities

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Russia was one of the largest suppliers of energy resources not only for Europe, but also for many nations around the world. Global community feared that outbreak of the conflict at the end of February 2022 would halt exports of key commodities from Russia. The Kremlin itself decided to use gas as a tool to blackmail Europe. However, after initial price shock on gas, oil and coal markets, prices fell and stabilized as Europe found other suppliers of these key commodities. Putin wanted Europe to freeze over the winter but reduced consumption, supplier diversification and warmer than expected weather pushed the prices below pre-war levels.

  • TTF natural gas: -42% y/y
  • US natural gas: -57% y/y
  • Brent: -17% y/y
  • ARA coal: +8% y/y

European gas prices have dipped to a level last seen before Russia launched its invasion of Ukraine in February, although are still higher compared to Asian markets. Currently, LNG gas accounts for a large part of European supplies, therefore prices on the Old Continent must remain competitive. Moreover, prices are still nearly two times higher than in the years before the pandemic. Source: Bloomberg, XTB

Agricultural commodities

Ukraine and Russia are often described as the granary of Europe. Although production of wheat, corn, rapeseed or sunflower in Ukraine and Russia is not that large compared to other key players, both of these countries are key global exporters. Majority of their agricultural products have been bought by poorer developing nations in recent years. Following the outbreak of war, prices skyrocketed and poorer countries lost their main suppliers and risk situation whether they could not afford to buy necessary agricultural products. Ultimately, a grain exports agreement was reached, which pushed prices to significantly lower levels.

  • Wheat: -15% y/y
  • Corn: 0.0% y/y
  • Sunflower: +5.2% y/y

Stock markets

Stock markets tend to be volatile in response to negative news, like for example war. It also should be said that global economy was in a rather poor shape when the war began - pandemic recovery programmes, combined with economy recovery, sent inflation rates into the sky and forced banks to undertake aggressive policy tightening. Stock markets found themselves under pressure. However, news of Ukrainian counter-offensive and lower inflation readings have triggered temporary rebounds.

Sectors of stock markets that have benefited from the outbreak of war can be spotted all across the globe. Those are not only defense companies, but also companies that were supplying product whose deliveries were distorted by Russia-Ukraine war. US defense company Lockheed Martin (LMT.US) gained over 20% over the past year. Raytheon Technologies (RTX.US), which also operates in the defense industry, saw its shares gain 8%. Of course, we cannot omit energy companies, whose stock benefited from sky-high margins. Dutch Shell (SHELL.NL) and UK BP (BP.UK) are examples of such energy companies.

Lockheed Martin and BP gained following the outbreak of the Russia-Ukraine war. Lockheed gained over 20% while shares of BP rallied over 40%. Source: xStation5

Sanctions, economy, inflation and China

Conflict between Russia and Ukraine is still ongoing. The West is providing massive support for Ukraine, by providing it with weapons, training for its military personnel as well as economic relief. Apart from that, a number of sanctions have been levied on the Russian finance sector and key export commodities. The Russian economy has benefited from sky-high energy commodity prices and it has allowed it to experience a smaller hit than the Ukrainian economy.

Commodity price increases and shutdown of some communications lines boosted inflation around the world. However, it should be said that inflation was on an uncontrolled, upward trajectory even before the outbreak of war. It seems that central banks have achieved at least a partial success but it should be said that a bulk of current deceleration in price growth is driven by a drop in commodity prices.

One should not also forget about China, whose ambition it is to change the direction of dependence on Russia. Current Russian commodity sales revenue is generated mostly via sales to Asia. On the other hand, China has not decided on a similar move as the Russian and refrained from invading Taiwan as it could be a massive disruption to global supply chains.

Will the end of war trigger a market bull run?

Investors have been hoping for months for any signals suggesting a potential cease fire or peace negotiations. Currently, such a scenario seems neither quick, nor likely. Markets got used to war. One cannot rule out the possibility of Russia further restricting flows of energy commodities given that numerous countries embrace price caps that Russia opposes. On the other hand, it does not seem to be the base case scenario. The end of the war would be good news primarily for Ukraine but would unlikely be a breakthrough from a market point of view. However, it could pave the way for a quicker solution to issues like inflation or risk of economic recession. On the other hand, financial markets have been flooded with negative news as of late and such good news like the end of the Russia-Ukraine war could be a trigger for the return of the bull market.

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