A dramatic day for stock markets has highlighted useful hedges against further volatility on the back of escalating tensions, as our City expert reports.
A wild session for investors following Russia's escalation of the Ukraine crisis today saw oil prices near $100 a barrel and the FTSE 100 index rebound 160 points off its initial low.
The top flight briefly traded below its starting point for 2022, reflecting a flight from risk after Vladimir Putin ordered troops into two breakaway regions of eastern Ukraine.
Stocks including Russian steel producer EVRAZ (LSE:EVR) were as much as 6% lower at one point, only to stand 3% higher by lunchtime as stock market sentiment improved on the back of the Kremlin saying it remained open to diplomatic contact over the crisis.
The FTSE 100 rallied from a low of 7,365 to 7,526, before settling 22 points lower at 7,506. Russia's message also took some of the steam out of the oil market, after Brent crude got within a single dollar of the $100 a barrel threshold for the first time since 2014.
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Traders fear that the use of sanctions against Russia could send oil significantly higher if the world's second largest oil exporter holds back supplies in retaliation. And for as long as the crisis keeps energy prices high, there's even more chance that interest rates will have to rise in order to bring the current spike in inflation under control.
Capital Economics warns that a full-blown Russia-Ukraine conflict could send oil prices as high as between $120 and $140 a barrel. It also warns that this has the potential to add around two percentage points to headline inflation.
Chief economist Neil Shearing says: “In normal times, central banks would tend to look through an energy-led rise in inflation, but given the current high rates of inflation, and corresponding concerns about it feeding higher inflation expectations, it’s possible that this adds to the list of reasons for policymakers to raise interest rates.”
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Much of the impact has already been priced into Russian stock markets, after the Moex fell 10% yesterday in its worst session since 2014. But Shearing believes this is not the case in Europe, where markets have largely focused on the interest rates outlook.
He says: “Most of the sell-off in global equities this year can be attributed to the hawkish shift by the world’s major central banks. This suggests that there is still significant downside for global stock markets (and upside for safe havens, including US Treasuries) if the conflict escalates. It could also reverse this year’s pattern of European equities outperforming those in the US.”
The safe haven appeal of gold has sent the price of the precious metal towards its highest level in almost a year at above $1,900 an ounce, a move benefiting FTSE 250 stocks including Centamin (LSE:CEY) and Hochschild Mining (LSE:HOC) after their shares rose more than 1% today.
One exception has been the former Russian gold miner Petropavlovsk (LSE:POG), after the former Peter Hambro business fell another 7% to take losses for the past week to 25%.
BP (LSE:BP.) and Shell (LSE:SHEL) offer one of London's best hedges against an energy price shock, while shares in North Sea focused Energean (LSE:ENOG) and Harbour Energy (LSE:HBR) were both 3% higher in the FTSE 250 today.
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Analysts at Liberum note that Russia is also a major exporter for platinum group metals, diamonds and vanadium, the prices of which may rally on the back of supply disruptions. The broker says this might benefit the likes of Glencore (LSE:GLEN), Anglo American (LSE:AAL), Sylvania Platinum (LSE:SLP), Gem Diamonds (LSE:GEMD), Petra Diamonds (LSE:PDL) and Ferro-Alloy Resources (LSE:FAR).
The weighting of the oil and commodity giants should also mean the FTSE 100 index continues its recent resilience, having remained in positive territory during the recent storms affecting US growth stocks.
Despite the latest aggression, UBS Global Wealth Management believes Russia's tactics are still part of a high-pressure negotiation and that fighting and a prolonged interruption of energy exports continues to be a tail risk.
Chief investment officer Mark Haefele says: “At this point, we doubt the full scale of sanctions threatened by the West will be rolled out.
“Comments by various European leaders suggest that a proportional response will likely be chosen to retain the deterrence of harsher sanctions. This will allow the international community to keep the door open to diplomatic efforts, and to minimise collateral damage to the European and global economy.”
Haefele said allocations to commodities and energy stocks are an attractive option to help investors hedge portfolio risks. “Energy prices would likely rise in the event of an escalation around Ukraine, as well as if cooler heads prevail amid rising demand and somewhat constrained supply.”
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