This will not be over soon and a new Cold War is all but certain, with cyber-action adding a major twist.
pite wild volatility, the Dow lost less than 500 points on the day of the invasion and, in fact, recovered a little ground the following day.
Most people are horrified and saddened by Putin’s invasion of Ukraine, which has already led to too many deaths and injuries, and created oceans of fear, displacement and uncertainty. For Ukrainians, whether working overseas or stuck in the middle of the war at home, the trauma is that much more painful and real.
There’s no telling where it will go—at this stage, nobody knows whether Putin will be content to have terrorised the country out of its dreams of joining NATO, or whether he will keep up the pressure till he is able to change the regime in Kyiv, or whether his plans are to push even further to, perhaps, other countries on Russia’s border. With Western countries shockingly circumspect both in terms of direct support and sanctions, it appears the prospects of an all-out global war are dim; however, Ukrainians have a history of resistance and they will not give up their hard won independence without a real fight—tragically, much blood will be shed. This will not be over soon and a new Cold War is all but certain, with cyber-action adding a major twist.
Markets have, of course, reacted wildly with volatility rising everywhere. Oil shot over $100/bbl, equity markets everywhere plunged and the dollar rallied. But markets are amoral, and once the knee-jerk was over, most markets recovered some of the lost ground, albeit with higher volatility.
Oil, which had crossed $90 about a month ago as part of the generalised rise in commodity prices and shot past $100 after the attack, appears to have settled a little lower, as market tries to assess how the sanctions will affect supply to Europe. It is significant to note the blue sky above $105 running all the way up to nearly $ 130. To my mind, this threat will likely keep the “West” cagey about going all-out against Russia.
US equity markets tanked, but despite wild volatility, the Dow lost less than 500 points on the day of the invasion and, in fact, recovered a little ground the following day. Technically, it fell below a long term support at around 33,500, but the downside appears to be protected by another support at around 32,000 (and rising). While, in this environment, nothing is really clear, it is possible that this drop may simply be part of the much-awaited shake-out resulting from the Fed changing its monetary stance.
Indian equities, which had already been softening, took a sharp blow, with the Sensex losing almost 3,000 points. Remarkably, it bounced back the very next day—like I said, markets are amoral and many Indian punters, who felt that the long decline from 60,000+ was overdone, were looking for a major dip to buy.
The rupee also slipped on the invasion, but it remains straight-jacketed within the pattern shown in the chart. Despite the last minutes of the MPC, RBI is—or, certainly should be—more concerned about inflation that it is letting on; the sell-buy swaps that it conducted last week to shift its maturing forward purchases of dollars 1-2 years into the future was to prevent pushing more rupees into the market at this time (if they took delivery) which would have fanned already difficult inflationary pressures.
The crisis will doubtless render emerging markets less attractive to investors, which means that FPI inflows, which had been reasonably strong earlier this year—the reserves have risen by $25 billion since January—will certainly slow down. This, together with the fact that oil prices are dangerously high—and could spike higher if the situation in Ukraine gets much worse—will certainly pressure the rupee.
Even if the crisis settles into a lower key with the fighting hopefully quietening down, the big issue for markets will remain inflation. Irrespective of whether oil prices climb further or not, inflation is certain to stay high, and probably rise as the uncertainties of war and the impact of sanctions will exacerbate the supply chain issues plaguing world markets.
The Fed will need to balance this with the likelihood that growth will also be negatively impacted. I would hope, though, that the Fed has learned its lesson and recognises that containing inflation, at all times, is always more critical. Thus, US interest rates should rise as expected, which could, on the one hand, calm equity markets, and, on the other, put further pressure on the rupee.
RBI has been active on the buy rupee side whenever it perceived the rupee has fallen “too far”— the lower line in the chart. With still huge reserves and a critical need to keep inflation contained, it remains to be seen whether RBI will be able to hold the line in these changed circumstances.
The author is CEO, Mecklai Financial; www.mecklai.com