Political uncertainty and turmoil on the international typically breeds market volatility, and the unrest in Ukraine has been no exception. As a major producer and supplier of gas to Europe, fears over a conflict with Russia had gas prices tumbling over fears of limited supply. Conversely, oil saw a jump as demand was likely to increase as a result.
The volatility in the markets prompted by Russian military posturing and widespread global condemnation was not limited to the commodities markets, however. The major indices also suffered, the FTSE in particular dropping to as low as 6670.3 as investors sought to trim risk from their portfolios. The Russian MICEX index fell, losing as much value in a day as the cost of the Sochi Olympics. The Russian rouble however was the biggest loser, as investors fled the currency towards safer havens such as the Yen. USD/RUB suffered a massive fall as risk-averse investors fled the emerging market.
One of the most typical flights to safety is that towards gold. Typically in times of turmoil, investors seek to revert to the “safe” investment of gold, which tends to retain its value even in times of war and unrest. This was no exception, as gold rose 2%, touching $1354.80, a four-month high.
However, on Tuesday signs emerged that Russia might seek to avoid any further escalation in the face of global condemnation. President Vladimir Putin ordered troops engaging in exercises along Ukraine’s Eastern border to withdraw and return to their base. A purported deadline for surrender of Ukrainian troops in the contested Crimea region, allegedly issued by Russian forces, also passed without incident.
In response the markets moved the other way, with gold falling 1%, dropping as much as $13.75 as equities rebounded strongly in the wake of more positive news. The bearish backdrop for gold remains very much in place, and the momentary panic could do little to disguise this. If anything, the small spike will have represented a good selling opportunity.
The rouble saw a rebound in response as fears that sanctions imposed by the international community would isolate the Russian economy were dampened. Safe haven currencies such as the Yen dropped back down again as the Euro and Dollar gained.
Market volatility is likely to remain for some time, as Russian forces have still not been withdrawn from Crimea, and uncertainty remains over what the international response will be. With news coming in a constant stream from the region, expect related currencies to continue to fluctuate, along with key energy commodities such as oil and gas, supplies of which are likely to be impacted by any sanctions or conflicts with Russia. Linked to this are the prices of key producers such as BP, Shell, ExxonMobil and others, and other equity prices of firms operating in this sector.