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Conflict in Ukraine

There is no doubt the Russian invasion and resulting conflict in Ukraine will have a short-term impact on markets. The price of energy has risen and will continue to do so. In a global economic climate already facing inflationary pressures, the impact will expectedly influence the price of goods and services, likely resulting in supply issues. As one would expect based on previous geopolitical events, wars and conflict create uncertainty for markets.

The conflict in Ukraine background

The Russian-Ukrainian War is an ongoing war. It started in February 2014 after the Ukrainian Revolution of Dignity.  It initially focused on the status of Crimea and regions of the Donbas, which are internationally acknowledged as part of Ukraine. The initial eight years of the conflict included the Russian annexation of Crimea in 2014, the war in Donbas from 2014–present, between Ukraine and Russian-backed separatists, naval incidents and cyberwarfare, and political tensions.

During 2021 and early 2022, there was a significant Russian military build-up surrounding Ukraine’s borders. The North Atlantic Treaty Organisation (NATO) accused Russia of planning an invasion, which it denied. Russian President Vladimir Putin criticised the expansion of NATO as a threat to Russia and demanded Ukraine be prohibited from ever joining the military alliance. Putin also expressed Russian irredentist views, questioned Ukraine’s right to exist, and stated Ukraine was wrongfully created by Soviet Russia.

On February 21 2022, Russia officially recognised the two self-proclaimed nonconformist states in the Donbas and flagrantly deployed troops into the territories. Russia invaded Ukraine three days later. Majority of the international community have condemned Russia’s actions in post-revolutionary Ukraine.  Accusing Russia of breaking international law and violating Ukrainian sovereignty. As a result, many countries implemented economic sanctions against Russia, Russian individuals, or companies, especially after the 2022 invasion.

The conflict significantly expanded when Russia launched a full-scale invasion of Ukraine on February 24 2022.

Past wars impact the market

From a perspective of the market, the impact of the COVID shutdowns was much worse than historical geopolitical events. However, considering liquidity and credit crises such as the 1987 stock market crash and the GFC, these had a much more significant impact on investments.

It is crucial to concentrate on long-term goals from an investing perspective through all of these events. Successful long-term investors survive short-term declines by sticking to investment principles that have withstood time tests. For portfolios, this may include better diversification. For equities, investing in profitable companies with solid balance sheets and stable earnings has historically given resilience to portfolios.

Conflict in Ukraine: the latest

US president Joe Biden approved a new military aid package, valued at $1bn, for Ukraine, including anti-aircraft weapons and armed drones to bolster the country’s defences against Russia’s invasion.

The move followed Ukrainian president Volodymyr Zelensky’s plea for the US to enforce a no-fly zone or provide fighter jets or other means to fend off Russia’s attack on his country.

According to five people briefed on the talks, Ukraine and Russia have made significant progress on a tentative peace plan, including a ceasefire and Russian withdrawal if Kyiv declares neutrality and accepts limits on its armed forces.

President Vladimir Putin said Russia would achieve all its aims in Ukraine and said international sanctions would damage the west by rising energy prices.

Biden named Putin a “war criminal” for the first time on Wednesday.

The UN’s top court ordered Russia to suspend military operations in Ukraine, but the court has no means to enforce that measure.

Russia launched a criminal case against a blogger for spreading what they called “knowingly false information” about the war in Ukraine, which carries a possible sentence of up to 15 years in prison under a new law.

Conflict in Ukraine: economic activity

Governor of the Reserve Bank of Australia (RBA) Philip Lowe states that the war in Ukraine is obfuscating the global economic outlook, with spiking energy prices set to drive inflation higher. Still, head of Commonwealth Bank Matt Comyn said the conflict would have a limited local effect.

“The global economy is continuing to recover from the pandemic,” Dr Lowe said after the bank’s March board meeting recently. “However, the war in Ukraine is a major new source of uncertainty.”

Particularly, the RBA governor noted it was ambiguous how lasting the recent pick-up in inflation would be, given the association between the conflict and spikes in energy prices, such as the record-high petrol costs.

Mr Comyn said the war had evoked increased levels of volatility as markets reacted to sanctions, but trade relationships between Australia and Russia were insignificant.

The RBA maintained the current record-low 0.1% cash rate for another month; he told an Australia-Israel Business Council lunch.

Financial markets marginally moderated rate hike expectations ensuing the meeting. However, traders are still forecasting four interest rate rises in 2022 and a cash rate of at least 1.25% by February 2023.

Dr Lowe said the board was inclined to be “patient” and ensure inflation was sustainably within the bank’s 2 to 3% target band prior to normalising emergency level monetary policy settings.

Headline inflation increased to 3.5% in the December quarter, while underlying inflation, the RBA’s preferred measure, lifted to 2.6 per cent.

Global oil prices rose dramatically in the days ensuing Russian troops invading Ukraine.  Brent Crude was trading at slightly over $US100 ($137) a barrel on Tuesday, and West Texas Intermediate was priced at $US96 a barrel.

The lift in international fuel costs significantly contributes to rising Australian petrol pump prices. We have seen petrol hit record highs in recent months, and they could go higher from here.

In a positive indication for pandemic-related disruptions, supply chain pressures seem to be easing following an October peak, according to the Global Supply Chain Pressure Index, The New York Fed launched in January.

The RBA has stated wages growth of 3% is required for inflation to be within the target band sustainably. The Bureau of Statistics wage price index rose 2.3% in the three months from October to December 31.

However, in recent months, the governor’s outlook has shifted to consider broader “labour costs” measures, which economists interpret as proffering the bank more options for when to hike rates.

Early indicators suggest prices continued to rise strongly in the new year.

Underlying inflation increased 0.5% in February to be 3.2% over the preceding year and above the RBA’s target band, according to the Melbourne Institute monthly inflation gauge.

The inflation gauge tracks inflation on a month-by-month basis compared with the Bureau of Statistics’ quarterly metric.  It will stoke expectations that the central bank will be forced to raise interest rates this year.

Outlook on the conflict in Ukraine and the market

Stock markets usually recover from geopolitical events. The uncertainty of war for investors is they do not know how bad the impact will be and how long it will take the market to recover. Should they be lucky enough to have their lives and good health, it is essential to remember the uncertainty of war for those directly affected by the war. Our thoughts are with the innocent victims of this conflict, and we recognise how lucky we indeed have it in Australia.

Vogue Advisory Group – Here to help you in times of uncertainty

If you need any financial advice or have questions about uncertainty in the market, please contact us.

conflict in Ukraine