Thu. Jan 20th, 2022


God created war so that Americans could learn some geography, Mark Twain said. Europeans who are geographically challenged also have good reason to look for Ukraine on the map. Russia warns US and NATO to make concessions or face a deteriorating security situation in Europe.

Markets have so far been untouched by the threat of war. If there is a conflict – perhaps a partial Russian invasion of Ukraine – the focus will be on energy. But prices will be much wider affected by inflationary pressures.

Natural gas prices in Europe are already reflecting pressure on local stocks. A doubling of natural gas prices on the continent and in the UK has also pushed up electricity prices. Energy rose from its usual trading range. It will go even higher if Russia invades Ukraine and stops exporting gas.

Energy price increases will put pressure on retail suppliers, such as Centrica, and large consumers, such as chemical manufacturers. This will benefit UK-listed explorers such as Serica Energy, whose shares have more than doubled in one year. Europe may even have to fall back on coal, says Bjarne Schieldrop at BEE in Oslo.

It is unlikely that the US will intervene militarily if Russia invades its smaller neighbor. Instead, America will tighten sanctions, and cutting off Russia’s US banking lines will do collateral damage to US banks and corporations they deal with. Russia’s economy is chambolic, but it has significant wealth, reflected in $ 630 billion in foreign exchange and gold reserves, the highest since at least 2007.

Lex charts showing Ukrainian sovereignty, bond price and yield distribution vis-à-vis the US Treasury concerned and the latest graph showing Russian natural gas flow to Europe traveling through Ukraine's natural gas supply has fallen

Ukraine’s sovereign effects performed poorly. Its US dollar 7.4 percent coupon 10-year mortgage has fallen since October. The yield distribution to its US treasury equivalent has increased by 200 basis points since mid-October.

Companies operating in Ukraine, such as Ferrexpo, are also at risk. The market value of the London-listed iron ore miner’s shares fell in line with the commodity, leaving it at £ 1.8 billion. A raid will cause stocks to fall further.

Currently, there is more jaw than war-to-war. Expect big price shifts if peace negotiations fail and tanks start rolling.

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