Posted Feb 21 2022 at 16:34Updated Feb 21. 2022 at 06:47 PM
The financial markets continue to waltz to the rhythm of the score written by Moscow . The stock markets of the Old Continent experienced a new bout of weakness on Monday, following renewed tensions within the separatist regions of Donetsk and Luhansk in Ukraine.
In Paris, the CAC 40 index closed down 2.04% to around 6,788 points. Investors are nervously following developments in Ukraine: earlier in the day, the Parisian index set a new low point since the start of the year, at 6,744 points. Germany’s DAX lost 2.07%, while Britain’s FTSE fell 0.39%. On Wall Street, closed due to a holiday, futures contracts were also clearly in the red.
Fear of an energy crisis
The good business results and the rebound in activity following the end of the epidemic wave linked to the Omicron variant were no match for the deterioration of the security situation in Ukraine. The threat of a large-scale armed conflict at the gates of the European Union continues to paralyze investors.
Admittedly, “historically, market declines due to conflicts between nations are generally short-lived,” notes Mark Haefele of UBS. But investors fear a runaway that “would have a macroeconomic impact, for example by disrupting oil and gas flows to Europe, or by wider constraints on agricultural products and industrial raw materials”, adds – he.
Russian natural gas is in fact used as a “marginal” source of energy, i.e. it is used to meet European energy needs when other sources (nuclear, renewables, coal) are already used at capacity or unavailable, underlines Gilles Moëc of AXA IM.
“Precisely because it is the marginal source needed to generate electricity, demand is inelastic to price changes, pushing wholesale gas prices even higher, compounding the effect of concerns about Russian supply in the context of the Ukrainian crisis”, he explains.
Stock market panic in Russia
But Europe would not be the only ones to suffer in the event of a military escalation in Ukraine. Russia could not escape economic repercussions, whether through Western sanctions or the deterioration of its trade relations. Russian gas is certainly essential to European energy security, but the revenues derived from its export are just as essential for Russian state revenues.
As a result, the Moscow Stock Exchange is sinking as investors prepare for the worst. Gazprom lost more than 10%, while oil producer Rosneft fell 18%. The MOEX index plunged 10%, while the broader, dollar-denominated MSCI Russia index tumbled more than 12%.
The price of Russian bonds falls
In both cases, it is one of the most brutal falls in recent years for the Russian markets, more violent than during the stock market panic of March 2020, at the start of the pandemic. The only sessions with higher falls followed the implementation of Western sanctions following the annexation of Crimea in 2014 and the assassination of Sergei Skripal in the United Kingdom by Russian agents, in 2018.
Tensions are also visible on the bond market. The yield on Russian 10-year bonds exceeded 10% on Monday after rising 75 basis points during the session. At the start of the year, it stood at 8.50%. Faced with the panic movement on Russian assets, the Ministry of Finance gave up issuing a new bond denominated in rubles on Tuesday.