Markets are reeling as war knocks again on Europe’s door

After two weeks of conflict between Russia and Ukraine, markets are still struggling to stabilise. Safe havens are in high demand, commodities are soaring to the point where the rise in wheat prices is causing fears that the price of bread will rise too, and anyone with a motor vehicle will have noticed that fuel prices are soaring. The continued advance of Russian troops in Ukraine and Vladimir Putin’s unyielding resolve are weighing heavily on the euro. Euro-denominated assets have been hit hardest, and Europe is suffering the most from the consequences of the conflict because of its dependence on Russian or Ukrainian raw materials and the commercial links between its companies and Russia. The European currency is losing value while the Swiss franc continues its advance. It traded at 0.9973 against the euro on Monday morning, a price not seen since it when to the floor price in 2015. The single currency has returned to parity and is now trading above 1.0100, likely because the Swiss National Bank is expected to intervene. SNB Governing Board Member Andrea Maechler said that ‘the bank is following the development of the franc very closely’. Per Ms Maechler, at the beginning of the hostilities there was little appreciation, but the situation has changed dramatically as the intensity of the hostilities increased. Moreover, the rise in inflation makes the SNB’s task a little more difficult. Published on Thursday, the consumer price index rose back above the 2% target. Driven by rising commodity prices, inflation now stands at 2.2%, up from 1.6% the previous month – well above analysts’ expectations of 1.8%. Asked about the likelihood of raising interest rates on the franc, Ms Maechler said the SNB would do so as soon as it could, but the current situation does not allow it even with inflation above its target.

The war at the gates of the eurozone has put the single currency under pressure. The euro fell to $1.0822, the lowest since May 2020. The lifting of the measures to combat the pandemic had given the European currency a boost and it had risen to 1.2350. But the prospect of a rate hike in the US and the outbreak of war in the Ukraine have dampened the rally and now seem to be opening the door to even more downside. The currencies that are suffering most from these events are those of Ukraine’s close neighbours, namely the Polish zloty, the Czech koruna and the Hungarian forint, which are falling to historic lows. The forint and the zloty have plunged by more than 5% against the already battered euro. Against the dollar, they are trading at levels not seen since the early 2000s in the case of the zloty – and at all-time lows for the forint. The low level of reserves held by the two central banks strongly limits their ability to intervene in the foreign exchange market. The Bank of Poland yesterday raised its main interest rate by 75 bps to 3.5% to defend its currency.

But it goes without saying that the biggest loser is the Russian rouble which, in a market that virtually no longer exists, has risen from 74 roubles to the dollar at the beginning of February to 177 roubles late on Monday. Sanctions and the banning of the country have made Russian assets very difficult or impossible to trade. The foreign exchange market is due to reopen today and the stock market tomorrow according to the Central Bank.

The military events have meant that the economy has taken a back seat in recent days. But in the US, the labour market continued to rebound. 678,000 new jobs were created last month, well above expectations of 440,000. The number of jobs created in December and January was also revised upwards to 588,000 and 481,000. The unemployment rate fell by 0.2% to 3.8% and the average hourly wage rose by 5.1% over one year. A half-point hike in the Fed’s benchmark rate, which seemed to be a done deal, is now being reconsidered in light of the situation in Ukraine. Jerome Powell remains in favour of a rate hike, but says he wants to proceed with caution because, while inflation must be contained, the war is likely to have a significant impact on the global economic recovery. Therefore, it should only be a quarter-point hike.

Unsurprisingly, gold is soaring to over $2,000 an ounce, the highest since September 2020. Silver is following at $26.60 per ounce. Palladium hit an all-time high of $3,442.47. Nickel soared to $100,000 a tonne (from less than $30,000 on Monday), a 500% increase since the beginning of the year, forcing the London Metal Exchange (LME) to suspend trading. Aluminium exceeded $4,000 per tonne for the first time. On the losing side, of course, are the stock markets, which are all in the red, with drops of 9% in the US to 16-17% in Europe over the past month.