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Markets Retreat as Ukraine Crisis Deepens Markets Fall As the Crisis In Ukraine Intensifies
(about 4 hours later)
PARIS — The growing crisis in Ukraine hit global financial markets on Monday, unsettling investors who had already been nervous about shaky emerging market economies. The escalating crisis in Ukraine created turmoil in global markets on Monday, hitting stocks from Wall Street to Ukraine and causing a spike in oil and natural gas prices that could reach into consumers’ wallets.
The biggest impact was felt on Russian and Ukrainian markets, with the Moscow benchmark Micex index dropping 9.4 percent, and the ruble falling to a record low against the dollar. Stock exchanges around the globe were jolted, with investors selling off shares particularly in companies with exposure to Ukraine and Russia, and moving into traditionally safer assets like United States bonds and Japanese currency. But despite fears that the conflict between Russia and the West over Ukraine could shift into a military confrontation, analysts said there was little risk of global financial contagion or of major blowback to Western economies.
Stocks in United States dropped, too. The Dow Jones industrial average fell nearly 1 percent, while the Standard & Poor’s 500-stock index was off 0.74 percent. “If this turns into an outright war, it will be a different story,” said Holger Schmieding, chief economist at the private bank Berenberg in London. “More likely it will remain a Cold War-style standoff, and if that’s the case the economic damage for the West and the global economy will be limited.”
“The escalation of the crisis is clearly a shock to emerging market sentiment,” Michala Marcussen, the global chief economist at Société Générale, said. While the economic fundamentals suggest the damage should be contained to Ukraine and Russia, she added, “we have to be aware of market psychology.” Still, the growing crisis in Ukraine is unsettling investors, who have already been nervous about shaky emerging-market economies. The biggest impact was felt on Russian and Ukrainian markets, with the Moscow benchmark Micex index dropping 10.8 percent. The ruble fell to a record low against the dollar, with concerns spreading to currencies in nearby countries like Hungary, Turkey and Poland.
The fallout from the crisis, with Ukraine moving to mobilize its military after Russian troops and Ukrainians loyal to Moscow surrounded key military bases in the Crimea, hit European stocks hard early in the day. The turmoil in Moscow markets prompted the Russian central bank to announce a “temporary” 1.5 percentage point rise in its benchmark interest rate target, to 7 percent. “The decision is aimed at preventing the risks for inflation and financial stability arising from the recent increase in financial market volatility,” the central bank said in a statement.
The Euro Stoxx 50 index of euro zone blue chips closed down 3 percent, while the London benchmark FTSE 100 ended the day 1.5 percent lower. Markets were also off sharply in Ukraine’s neighbors Hungary and Poland. In developed markets, shares sank as well, with companies with exposure to Ukraine and Russia taking the biggest beating. The Euro Stoxx 50 index of European blue chips closed down 3 percent, while the Dow Jones industrial average lost 153.68 points, or 0.9 percent, to 16,168.03. The Standard & Poor’s 500-stock index took its biggest drop since Feb. 3, falling 13.72 points, or 0.7 percent, to 1,845.73. The Nasdaq composite index dropped 30.82 points, or 0.7 percent, to 4,277.30.
Ukraine makes up only about 0.2 percent of global gross domestic product, according to Société Générale, and in itself has little bearing on the world economy. Economists said the biggest danger to global growth, outside of outright war, was the possibility that sanctions or political theater could bring a disruption to the flow of natural gas to Western Europe, creating an external shock that could push the fragile euro zone back into recession. At the same time, investors moved into traditionally safer assets like United States bonds and the Japanese currency. The price of the benchmark 10-year Treasury note rose 13/32 to 101 9/32, and its yield fell to 2.61 percent, from 2.65 percent late Friday.
The crisis has energy markets worried because a large portion of Russian natural gas for Europe, which is heavily dependent on the fuel for power and industry, moves through Ukraine. Natural gas prices rose about 6 percent on the British market, and shares of Gazprom, the Russian gas monopoly that counts Ukraine as a major customer, fell more than 10 percent. “The escalation of the crisis is clearly a shock to emerging-market sentiment,” said Michala Marcussen, the global chief economist at Société Générale. While the economic fundamentals suggest the damage should be contained to Ukraine and Russia, she added, “we have to be aware of market psychology.”
What may be keeping prices from going higher for now is that in recent years Russia has chipped away at the amount of gas that goes through Ukraine by opening the Nord Stream pipeline, which bypasses the country. In addition, because the winter has been warm, European countries have built up substantial stores of gas. While many major indexes are trading at near-record levels, global markets have become increasingly volatile of late. Jitters caused by serious political problems in countries like Thailand, Argentina and Turkey have been exacerbated by concerns that growth in emerging markets will be stymied as the Federal Reserve reduces its monthly bond purchases.
Trevor Sikorski, an analyst at the research firm Energy Aspects, estimates that Europe has about 18 days’ worth of gas in tanks. “The markets are jumpy because there are so many potential outcomes,” Mr. Sikorski said. “But there is a bit of wait-and-see to see how bad this gets.” The situation in Ukraine has only played into those fears.
Oil prices also rose, with Brent crude futures traded in London adding 1.9 percent. Ukraine makes up only about 0.2 percent of global gross domestic product, according to Société Générale, and in itself has little bearing on the world economy. Rather, economists said the biggest danger to global growth, outside of outright war, was the possibility that sanctions or political theater could bring a disruption to the flow of natural gas to Western Europe, creating an external shock that could push the fragile euro zone back into recession.
While many major indexes, including the Standard & Poor’s 500 and the DAX in Germany, are trading at near-record levels, global markets have become increasingly volatile of late. Jitters earlier this year caused by serious political problems in countries like Thailand, Argentina and Turkey have been exacerbated by concerns that emerging markets will be hit by higher interest rates as the Federal Reserve reduces its monthly bond purchases. The crisis has energy markets worried because a large portion of Russian natural gas for Europe moves through Ukraine. Natural gas prices rose about 6 percent on the British market, and shares of Gazprom, the Russian gas monopoly that counts Ukraine as a major customer, fell more than 10 percent. Oil prices also rose, with Brent crude futures traded in London adding 1.9 percent. What may be keeping prices from going higher for now is that in recent years Russia has chipped away at the amount of gas that goes through Ukraine by opening the Nord Stream pipeline, which bypasses the country. In addition, European countries have been able to build up substantial stores of gas, given that the winter has been warm.
The fresh shock to markets on Monday came amid the rising anxiety over the military standoff in Ukraine. The country is facing a possible default on its debt, and its economy was hobbled even before Russia’s armed intervention. Stocks with direct exposure to Russia and Ukraine also took a hit.
Stocks on the Ukrainian exchange in Kiev fell 11.6 percent, and the country’s currency, the hryvnia, fell to a new low against the dollar. Several of the biggest western oil companies like ExxonMobil and Royal Dutch Shell have major investments in Russia. BP, the British oil company, has significant interests with a 20 percent stake in Rosneft, the state-controlled oil company. Robert W. Dudley, BP’s chief executive, serves on Rosneft’s board, and BP has been in talks to send teams of technical experts to help the Russian company. On Monday, BP shares fell 2 percent in London.
The interim Ukrainian government is negotiating with the European Union, the United States and the International Monetary Fund for a bailout of as much as $35 billion to get it through the next two years, and a team from the fund was to arrive in Kiev for discussions this week. Russia is also a big player in industrial metals, and most of the world’s major brands are significantly invested in the country. “That means Russia is very important for a range of European and American companies,” said Chris Weafer, co-founder of Moscow-based Macro Advisory. For instance, Russia is the No. 1 market for the French dairy giant Danone and the second-biggest market for Pepsi. Shares of the French automaker Renault, which also has major operations and sales there, fell 5.4 percent.
Jérôme Vacher, the fund’s representative in Ukraine, said a fact-finding mission would arrive Tuesday “to assess the current economic situation and discuss the policy reforms that could form the basis of a Fund-supported program.” Mr. Vacher said the mission plans to conclude its work by March 14. European banking shares were broadly off, led by a 9.6 percent decline in Raiffeisen Bank International, the Austrian lender that ranks as one of the Western lenders most exposed to Ukraine. UniCredit, the Italian lender, fell 6 percent, while BNP Paribas of France and Piraeus Bank of Greece each declined more than 3 percent.
The Tokyo market, Asia’s biggest, also fell, with the Nikkei 225 stock average dropping 1.3 percent. The Hang Seng Index in Hong Kong fell 1.5 percent. But the fallout to the banking sector may be somewhat limited. During the financial crisis in 2009, many Western banks pulled back from Ukraine, and Russian lenders, particularly Sberbank and VEB, stepped in to take up the slack. Raiffeisen is one of the few European Union lenders with major Ukraine business, and it said in November that it was seeking to sell the local unit, known as Raiffeisen Bank Aval.
Investors sought safe havens in government bonds, pushing down yields of United States and German government debt. The dollar gained against the euro and against the British pound, while the yen gained against its American counterpart as Japanese investors sold overseas investments and repatriated their funds. Ms. Marcussen of Société Générale said that investors would be closely watching the progress this week of an expected International Monetary Fund mission to the Ukrainian capital, Kiev. The interim Ukrainian government is negotiating with the European Union, the United States and the International Monetary Fund for a bailout of as much as $35 billion to get it through the next two years. And a team from the fund was expected to arrive in Kiev for discussions this week.
The turmoil in Moscow markets prompted the Russian central bank to announce a “temporary” 1.5 percentage point rise in its benchmark interest rate target, to 7.0 percent. Of major concern, Ms. Marcussen said, would be whether the fund will seek major “haircuts” on the value of Ukrainian government debt, forcing private sector bondholders to book big losses. On Monday, bond prices in Russia and Ukraine jumped significantly, suggesting investors are worried.
“The decision is aimed at preventing the risks for inflation and financial stability arising from the recent increase in financial market volatility,” the central bank said in a statement. Over all, the biggest risks of the crisis may be more specifically to the Russian and Ukraine economies, which have been under pressure for a while. Even before Russia’s armed intervention, Ukraine faced a possible default on its debt, and its economy was hobbled.
European banking stocks fell, led by a 7.9 percent decline in Raiffeisen Bank International, the Austrian lender that ranks as one of the Western lenders most exposed to Ukraine. In Russia, growth has been slowing, as commodity prices fall and foreign investment dries up. Last year, growth came in just at above 1 percent, well below the 3 percent that international economists had forecast.
During the financial crisis in 2009 many Western banks pulled back from Ukraine, and Russian lenders, particularly Sberbank and VEB, stepped in to take up the slack. Raiffeisen is one of the few European Union lenders with major Ukraine business, and it said in November that it was seeking to sell its local unit, known as Raiffeisen Bank Aval. “What’s becoming clear is that Russia has finally come to the end of its oil-driven growth model. It needs a new investment driver, and needs to attract more foreign investment to diversify its industries,” said Mr. Weafer of Macro Advisory.
Other European banks with exposure to Ukraine also fell. UniCredit, the Italian lender, fell 5 percent, while BNP Paribas of France and Piraeus Bank of Greece each declined more than 3 percent.
Other companies with exposure to Russia and Ukraine were also hit, including BP, the British oil company, which fell 2.1 percent in London. Carlsberg, the Danish brewer, one of the leading beer makers in Russia, fell 5.6 percent. Renault, which jointly with its alliance partner Nissan Motor owns a majority of the Russian automaker Avtovaz, fell 5.4 percent.
Ms. Marcussen of Société Générale said that investors would be closely watching the progress this week of an expected International Monetary Fund mission to the Ukrainian capital, Kiev. Of key concern, she said, would be whether the fund will seek major “haircuts” on the value of Ukrainian government debt, forcing private-sector bondholders to book big losses.
Holger Schmieding, the chief economist at Berenberg Bank in London, said in a research note that the biggest risks in the crisis were to the Russian economy itself.
Russia is the market for only about 1 percent of European exports, he noted, and Moscow is so dependent on gas revenue that it will have little choice but to try to keep the fuel flowing.
“The Crimean conflict will likely trigger a near-term correction in markets and some jitters in sentiment indicators,” Mr. Schmieding said. “But we do not expect it to be bad enough to change underlying fundamental trends in a serious way.”