The dramatic escalation of tensions in Ukraine prompted a sharp increase in risk aversion among investors, driving equity prices lower across the board and triggering flows into “havens” such as US and German government bonds and gold.
As Ukraine’s prime minister insisted the country would “never give up” Crimea and Russia hit back at the US’s condemnation of Moscow’s deployment of troops in the peninsula, concerns about a “new cold war” dominated market thinking.
"The weekend's developments in Ukraine have opened a new frontier of political and financial risk for global investors," said Lena Komileva, chief economist at G+ Economics.
Weakest point
"Ukraine is merely the weakest point of a new axis of international political confrontation that is set to play out among the major players at the G20 level. The potential for extended uncertainty means geopolitical risk is back for global investors," she said.
The rapid increase in tensions about the region sent Russian equities and the rouble reeling. The rouble-denominated Micex stock index tumbled 10.8 per cent – its biggest one-day fall since 2008 – while the currency sank to fresh record lows against the dollar and the euro, prompting Russia’s central bank to raise its benchmark interest rate by 1.5 percentage points to 7 per cent.
But Neil Shearing at Capital Economics suggested the immediate fallout from the Ukraine crisis for Russia’s economy might be less severe than many fear.
“Firstly, concerns about the potential economic cost to Russia of any sanctions by the west may be overdone,” he said. “Secondly, while capital flight has accelerated over the past few days, Russia has amassed nearly $500 billion in foreign exchange reserves over the past decade.
“Nonetheless, with growth already stagnating, it will only add to the headwinds facing Russia. And while the near- term fallout may be manageable, the crisis could have significant longer-term implications for Russia’s economy.”
Ashraf Laidi, chief global strategist at City Index, said: "The main reason Russia will insist on keeping Ukraine in 'friendly' hands is to secure its Europe-bound gas exports, most of which pass through Ukraine. A third of Russia's gas is exported via Ukraine."
Gas prices
European natural gas prices rose sharply while Brent crude oil touched a 2014 high above $112 a barrel before edging back to $111.35, up $2.28 on the day. Meanwhile, risks of supply disruption pushed up agricultural commodities. Chicago wheat futures were on track for their biggest one-day gain since mid-2012, while corn futures reached a five-month high.
The turmoil undermined other emerging market assets, which have been battered this year by concerns about potential outflows triggered by the US Federal Reserve’s scaling back of economic stimulus measures. –(Copyright The Financial Times Limited 2014)
