Ukraine jitters create ‘perfect storm’ for market spooked by Fed

Bay with passing ships in Sevastopol, Crimea at sunset Source: iStock/Evgeniia Medvedeva

A fresh bout of risk aversion spread across markets Monday amid growing concern over potential Russian military action against Ukraine and as investors braced for the Federal Reserve to confirm a hawkish policy tilt later this week.

Haven currencies rallied and euro-area bonds advanced along with Treasures. The Swiss franc rose to the highest level against the euro in more than six years, while the Japanese yen and the U.S. dollar outperformed other Group-of-10 peers. Risk-sensitive currencies including the Australian and New Zealand dollars led losses and a gauge of European stocks dropped more than two per cent to the lowest in a month.

The moves mark a continuation of last week’s turbulence, as markets digested the prospect of a faster pace of hikes from the Federal Reserve and a reduction of its balance sheet later. Policy makers have made the case tighter policy this year to help fight inflation, spurring a rout in tech stocks. The Fed’s next decision is due Wednesday.

Meanwhile, tensions along the eastern border of Ukraine are mounting, with U.S. ordering family members to withdraw from the Kyiv embassy due to the “threat of Russian military action.” European Union foreign ministers will discuss Ukraine with U.S. Secretary of State Antony Blinken later Monday. President Vladimir Putin has repeatedly said he has no plans to attack.

“This is clearly a bit of a perfect storm,” said Kokou Agbo-Bloua, global head of economics and cross-asset research at Societe Generale on Bloomberg TV. Tensions over Ukraine are “clearly adding to that mood of uncertainty,” he said. 

Still, the moves are likely a “transitory market adjustment to a tightening cycle that has been well-telegraphed by the Fed last year,” he added. 

In emerging markets, the Russian ruble and South Africa’s rand led losses. The Russian currency fell as much as 2.8 per cent to trade at 79.4425 per dollar as of 12:12 p.m. in London, the lowest since Nov. 2020. The rand dropped as much as 1.2 per cent to 15.2895 against the greenback. 

“Russia/Ukraine headlines will prevent any meaningful bounce in equities and create a bid for fixed income,” in the short-term, wrote Mohit Kumar, a managing director of interest-rate strategy at Jefferies International.

© 2022 Bloomberg L.P.

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