Markets shaking from Harsh new Russian sanctions

Stocks are set to open sharply lower as strong Western sanctions spark risk aversion.

• BP announced it will offload its stake in Rosneft
• EUR/USD trades 1% lower highlighting the euro’s vulnerability to a war with Russia 
• Oil rises back over $100 on supply fears

A weekend is a long time when there is a war. European stocks closed on Friday significantly higher, with the FTSE rebounding almost 4% and the DAX 3.7% after sanctions on Russia were not as harsh as expected and amid optimism surrounding peace talks.

Fast forward three days and risk sentiment has taken a turn for the worse as the West ramps up pressure on Russia by imposing crippling sanctions. There has been a notable change of sentiment in Europe regarding sanctions, with an agreement to remove some Russian banks from the SWIFT internal payments system, something just a few days ago several countries in the EU, such as Germany opposed. Germany has even pledged to up its spending on defense to 2% of GDP.

Russia’s response to the latest round of sanctions has been to put its nuclear forces on high alert. Meanwhile, Russia’s attack on Ukraine continues, although Kiev is still under Ukraine’s control and talks of Russia, Ukraine negotiations continue to swirl.

The fears over where this attack on Ukraine is heading is hitting risk hard, with no area of the markets left unaffected. Will Putin stop Ukraine or are other border countries in the firing line too? European bourses are set for a sharply weaker start to trade, and US futures are expected to follow suit. 

BP to offload Rosneft stake

BP will be under the spotlight after announcing over the weekend that it has decided to come out of its stake in Rosneft. BP was the second largest shareholder in the Russian oil firm, but said given Russia’s invasion into Ukraine, it has been forced to reconsider its relationship with the company, which is majority owned by the Russian government. Whilst BP hasn’t said how it will offload its 19.75% stake, it will come at a cost of around $25 billion. BP shares are expected to open sharply lower.

FX

In the FX markets the safe haven US dollar, the reserve currency of the world, is paring earlier gains whilst the Russian rouble dived another 30% to a record low in the wake of the crippling new sanctions. Even traditionally neutral Switzerland is freezing Russian bank assets. 

The euro is taking a big hit from the latest developments, unsurprising given European reliance on Russian energy and vulnerability to a war on its doorstep. EUR/USD trades over 1% lower, below 1.12. 

Whilst there is no high impacting US and eurozone economic data due to be released today, ECB President Christine Lagarde is due to speak. Any suggestions that the ECB will adopt a more dovish approach to monetary policy in light of eastern European developments could weaken the euro further.

Oil

Oil has been one of the assets that has clearly tracked Russia-Ukraine risk. The latest round of sanctions from the West have boosted fears of supply disruption - possibly via a reactive move by Putin’s Russian government to new sanctions - sending oil prices firmly higher, recouping losses from the previous week. Brent once again moved across the $100 barrier, although has eased back slightly.