Stocks drop, oil pops as Russia, Ukraine tensions escalate

Risk off trade is pushing European indices lower as Russian troops enter the breakaway regions of Ukraine. Safe havens are in favour, whilst oil surges higher.

• Indices fall to a three-week low as Russia sends forces into parts of Ukraine
• Gold rises on safe haven flows and oil jumps on supply fears
• HSBC reports a jump in profits & announces $1 billion share buyback

Yesterday’s optimism of a Biden-Putin summit was short-lived, as Russia cast doubts over whether Putin would attend a meeting. This was quickly followed by Russia defying the West and recognising separatist occupied regions of Ukraine as independent, giving Putin cover to order Russian troops into these areas, on what Moscow is calling a peacekeeping mission. The West is condemning the latest moves by Russia, the US has already issued an executive order to halt all US business activity in those breakaway regions and banned all imports from those areas. 

Haven FX flows subside

These latest developments have thrown hopes of a diplomatic solution by the wayside, hurting sentiment and sparking a risk off reaction, although this is more evident in some areas of the market than others. 

For example, riskier stocks are out of favor, with indices across Europe expected to open deeply in the red. However, in the FX market, riskier currencies such as the aussie and the kiwi are actually heading higher, whilst the traditional safe haven yen is holding steady after booking gains yesterday. The US dollar is finding some safe haven support after falling lower yesterday and the Euro is under pressure.

Gold near 9-month high

Risk aversion is being played out in Gold which has pushed back over $1900 and is looking towards $1916 the May 2021 high. Whilst the price rose to a high of $1914 earlier today it has eased back slightly. Pullbacks in the price are likely to be seen as buying opportunities by those expecting an escalation of tensions in Ukraine.

Sanctions on Russian oil?

Oil prices are shooting higher, jumping over $2 per barrel on fears of supply disruptions as Russia, Ukraine tensions escalate. It is unlikely that the West will apply sanctions to Russian oil, given that they would effectively be shooting themselves in the foot. It has already been reported that new EU sanctions will be ‘modest’. However, Russia could well choose to limit supply, a move which could quickly see oil rise to $100.

FTSE dips despite end of restrictions

The FTSE is set to open sharply lower, although is holding up slightly better than its European peers after the British government announced the end of covid restrictions from Thursday. Those with covid will no longer be legally required to self-isolate. Such a move should allow the UK economy to get ahead as it exits from the pandemic, whilst also giving it an advantage over those economies where restrictions are still in place.

HSBC earnings

HSBC reported that pre-tax profits almost doubled in Q4 of 2021 to $2.7 billion, boosted by strong lending. The bank took a $450 million charge relating to its exposure to Chinese commercial real estate and warned over a slowdown expected in its Asia wealth business.  Full year pre-tax profits rose an eye watering 115% to $18.9 billion, which was just short of the $19.1 billion forecast. HSBC also announced a dividend of $0.18 and a $1 billion share buyback, on top of an earlier $2 billion buyback programme. The share price fell in Hong Kong and weakness could be expected when the stock opens for trade in London.