European stocks dropped, oil prices rallied, the rouble plunged and investors herded into the dollar and highly rated government debt after new sanctions imposed on Russia heightened tensions across financial markets.
The regional Stoxx 600 share index fell 1.6 per cent, Germany’s Xetra Dax lost 1.8 per cent and the UK’s FTSE 100 fell 1.5 per cent. The moves came after Russian President Vladimir Putin put his country’s nuclear forces on high alert and western powers imposed sanctions on Russia’s central bank in response to the invasion of Ukraine.
A sub-index of European banks fell more than 7 per cent as traders responded to uncertainty about the potential global effects of western allies locking some Russian lenders out of the Swift payments system.
Hong Kong’s Hang Seng index fell as much as 1.6 per cent to its lowest level in almost a year. Brent crude, the international oil benchmark, rose 4.4 per cent to $102.17 a barrel.
Global equities had rallied on Friday in a move analysts attributed to sanctions levelled against Russia steering clear of targeting the nation’s energy exports. But after financial sanctions against Russia were ratcheted up over the weekend, fund managers moved to de-risk their portfolios, backing away from strong bets on the global economy and future central bank policy while loading up on low-risk and easily tradeable assets.
“Investors are reducing their active bets,” said Michael Metcalfe, head of macro strategy at State Street. “Right now is a time to take stock, reduce positions and try to assess all the possible outcomes that could arise” from the geopolitical situation, he added.
The dollar index, which measures the currency against six others, rose 0.5 per cent. The yield on the two-year US Treasury note dropped 0.09 percentage points to almost 1.5 per cent, reflecting a significant rise in the price of the debt.
“It’s a flight to safety and cash is king at these times,” said Tatjana Greil Castro, co-head of public markets at credit investor Muzinich & Co. “Asset managers will have concerns about clients wanting to take money out and you want to pre-empt that by having liquidity to meet potential redemptions.”
The rouble dropped as much as 29 per cent to almost 118 against the US dollar on Monday morning. Russia’s central bank then more than doubled interest rates to 20 per cent and banned foreign selling of local securities in a bid to stem the fallout from sanctions.
Meanwhile, futures linked to TTF, Europe’s wholesale natural gas price, rose more than a fifth to €112 per megawatt hour.
A FTSE index of emerging market stocks also outperformed on Monday, falling just 0.3 per cent, as investors backed out of a popular trade based on betting against developing economies that remain affected by high rates of coronavirus.
“If investors have sizeable positions away from their target benchmark, these positions may feel too risky at the moment,” Metcalfe said. “One of the active bets many have had is to be underweight [emerging markets] so slightly perversely they have to buy back.”
Elsewhere, shares in BP dropped 6.8 per cent after the British group said at the weekend it would divest its near 20 per cent stake in Russian state oil provider Rosneft.
Futures markets implied the US S&P 500 share index would drop 1.7 per cent in early New York dealings.
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