Ukrainian conflict – 3️⃣ market scenarios

How Russian aggression could impact markets and which markets to watch❓

The news from US intelligence that the Russian aggression on Ukraine was a done deal spooked markets on Friday. While Russian denied it, the situation doesn’t seem to be getting any better. How will markets react to further developments?

Prepare for various options

We love to write about economic reports, company earnings and central banks – not about the war prospects. However, markets are reacting whatever the reason and investors should prepare for potentially turbulent times. This is why we present 3 potential scenarios of the Ukrainian conflict and highlight key markets that must be watched.

Watch these markets:

Stocks – Russian banks, RTS and… Nasdaq

VTB (VTBR.UK) and Sberbank (SBER.UK) – names of these institutions are nearly synonymous to sanctions on Russia. Little wonder these stocks are among top “plays” on the equity side. Investors may also focus on diversified RTS (RUS50) Index where Sberbank has 14% share – the index has plenty of energy stocks as well and is down 30% from late 2021 highs. A less obvious choice is Nasdaq (US100). Why would US tech stocks react to the conflict in Europe? Well, since this market has its own share of problems (mainly Fed tightening), other bad news are had to digest for investors.

Commodities – Oil, Gold, Platinum, Palladium and Wheat

Russia is the second largest exporter of Oil and the commodity is also some substitute for natural gas which has already been in tight supply in Europe. Gold has traditionally been a “top pick” for times of geopolitical uncertainty but we’d turn your attention to Palladium and Platinum – these are also precious metals but Russia is way more important here being the number 1 and 2 exporter respectively. Finally both Russia and Ukraine are important producers of Wheat.

FX – focus on USDRUB

FX is fairly obvious – any conflict is detrimental for the Russian ruble even despite high oil prices and significant interest rate increases in Russia. On the other hand, USD attracts liquidity in times of distress so USDRUB is the choice for investors here.

3 scenarios – invasion, tension and compromise

The worst case scenario is the one of invasion – the one already hinted by the US intelligence. Invasion means sanctions but actually not sanctions are key to reaction here (as the largest guns – like cutting off Russia from SWIFT – are supposedly off the table). Markets know that if Russia invades, forcing it to withdraw will be costly and that will feed uncertainty and fear. Critically negative for Russian stocks, negative for global stocks, positive for oil and precious metals and USDRUB.

The most likely scenario could be the one of prolonger tension – Moscow can pose threats for as long as it achieves certain results (there’s a talk of autonomy or even referendums in Eastern parts of Ukraine). While politically complicated this scenario can actually be a relief for the markets. For as long as invasion risk declines, this scenario is positive for stocks while being negative for oil, precious metals and USDRUB.

Finally a scenario we’d love to see – there’s a sound compromise and Russian troops are orders away from the Ukrainian border. This would be extremely positive for stocks (especially Russian banks and RUS50) while negative for oil, precious metals and USDRUB. Unfortunately, this scenario also seem to be the least likely.

XTB Research