Ukraine’s worsening crisis reverberated across financial markets on Monday, with shares slumping and precious metals jumping higher as investor sought safe havens.
Indices across Europe dropped by around 2% after Russian president Vladimir Putin ordered troops to Ukraine’s Crimea region, reportedly taking de facto control, amid words of condemnation from the West.
Russia’s main index plummeted 10%, while the rouble fell some 2.5% lower against the US dollar, despite the country’s central bank hiking rates from 5.5% to 7% in an attempt to stem financial outflows.
‘Political risk is likely to remain firmly on the financial market’s mind today’, commented Michael Every of Rabobank, adding ‘the most immediate impact of rising tensions in the region are likely to be on linked EM currencies and, potentially, upward pressure on energy prices.’
Matthew Kates of Nomura said it would be ‘sensible’ for investors to seek protection in assets including gold with ‘increased discretion around EM assets as the list of country-specific, idiosyncratic risks grows’.
The oil price jumped higher, with Brent crude futures up 2.1% to $111.40 per barrel. The gold and silver prices both leapt 1.4% to $1,345 per ounce and $21.50 respectively. That saw gold miner Randgold (RRS.L, up 4%) and silver producer Fresnillo (FRES.L, up 2.2%) among only a few London blue chips managing gains.
SSE (SSE.L), the energy provider, also benefited from the tensions, trading up 0.5% to £14.08. Alongside Drax (DRX.L), the company is the most likely beneficiary of the turmoil, explained Peter Atherton, analyst at Liberum: ‘UK power utilities offer a hedge against the market turmoil that may result from the political tension in Ukraine.
‘If the rise in European gas prices persist, this would be positive for the UK generators, especially those exposed to renewables and coal,’ he said.
The broader FTSE 100 retreated by 1.8% to 6,687.
A clutch of FTSE 250 listed companies with exposure to Ukraine and Russia fell the most in London. ITE Group (ITE.L), which organised conferences in countries including Russia, dropped 15% to 242p. Ferrexpo (FXPO.L), which mines iron ore in Ukraine, fell 10% to 137.8p. Bank of Georgia (BGEO.L) dropped 10% to £21.10
Adding to the poor sentiment to start March trading was more data showing a manufacturing slowdown in China. The final reading of the HSBC/Markit manufacturing PMI for February came in at 48.5, down from 49.5 in January. Below 50 signifies contraction. ‘As the PBC further reins in credit growth we expect the weakness in manufacturing to continue,’ said Julian Evans-Pritchard, an economist at capital Economics.
The equity market weakness comes after the FTSE on Friday ended a bumper February with a 4.7% rise for the month. That more than makes up for the 3.5% loss in January when concerns over the strength of emerging markets, as well as worries about the ‘tapering’ of US monetary stimulus, weighed on global markets.
Two months into the year and both the AIM index of small shares and the mid-cap FTSE 250 index are continuing their outperformance of the main blue chip listing, with a gains of nearly 5% each versus 0.9% on the FTSE 100.
As ever, investors will watch central banks closely this week. The European Central Bank and Bank of England are due to make policy decisions, while Friday’s US labour market update will feed into the debate over whether the US Federal Reserve will continue to gradually cut back its stimulus scheme.
On Wednesday China’s National Peoples’ Congress session starts, where the leadership will announce its economic targets and reforms for the year ahead. The government is expected to maintain a 7.5% GDP target for 2014 (after 7.7% growth in 2013).