Financial Market Issues Due to the War in Ukraine

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Financial Market Issues Due to the War in Ukraine

Introduction

The current situation in Eastern Europe has had a significant impact on the world. Since the beginning of the Russia-Ukraine war, various sectors of the economy have been impacted negatively, thus tempering the normal operation of the financial institutions. For instance, financial markets such as the stock market, the commodity market, and the bond market are experiencing the effects of the conflict, which has made the selling and buying of securities to be difficult. Financial markets play a vital role in facilitating the growth of economies; hence if it is negatively affected, most countries feel the heat irrespective of whether they contribute or not participate in the situation. The geopolitical aspect in Eastern Europe has caused a record rise in inflation in the commodity markets, causing the market to experience an increase in the prices of essential products such as oil and gases.

Types of Financial Markets

The Bond Market

This refers to the market setting where investors, financiers, shareholders, and stockholders buy and sell the debt securities. In most cases, the bonds are traded between the involved parties. The market is further known as the fixed-income, debt, or credit marketplace (Madura, 2020). The government institutions are the common entities that bring the bonds to the market. Similarly, companies use bonds to generate needed capital to finance their overall operations in the industry. The market for bonds is subdivided into primary and secondary. The former involves the creation of new securities that have never been offered into the market, while the latter entails the selling of securities that have already been brought to the marketplace.

The Stock Market

The stock market is the setting where shares of the listed companies are publicly issued and sold. Different corporations use the platform to sell their stocks to the public. The ability of the market to provide long-term financing to the listed organizations makes it considered a capital market. It is the most common marketplace globally where the issuing and selling of stocks occur (Purewal & Haini, 2021). They include the Nasdaq and the New York Stock Exchange (NYSE), which are most prominent in the US. In terms of size, the NYSE stock market is currently the largest in the world. Furthermore, some stock markets are the Shanghai Stock Exchange in China, the Tokyo Stock Exchange Market in Japan, and the London Stock Exchange Market in England.

The Commodity Market

The commodities market is where trading activities of raw materials take place. People, especially investors, sell and buy different products, such as gold, oil, wheat, gases, corn, and other valuable goods (Jiang et al., 2020). Some of the commodity exchanges found within the US are the New York Mercantile Exchange (NYMEX), the Chicago Mercantile Exchange (CME), and the Intercontinental Exchange (ICE). The commodities are categorized as either hard or soft, whereby the latter refers to an agricultural product, and the former entails natural resources, including gold and oil.

Impacts of the Russia-Ukraine War on the Financial Markets

There are a number of factors that significantly affect the financial markets. The emergence of war is a threat to the success and performance of the institutions in the economy. Since the Russia-Ukraine war began, the world has experienced a negative impact on the stock, bond, and commodity markets (Burggraf et al., 2020). Most of the items traded in the marketplaces are highly volatile, and a slight change in the trend creates a critical impact.

The start of the war in Ukraine caused turbulence in the stock market, whereby most investors took fright following the conflict. This move made the market suffer significant weekly losses. Immediately the conflict began, the shares price plunged in the London stock exchange market, in which a drop of 250 points was experienced on the Financial Times Stock Exchange (FTSE) (Costola & Lorusso, 2022). This aspect indicates how the war inflicted the stock market to react in a negative direction. Similarly, the French and German stock exchange markets fell by more than 3.5%, making the Dax in Frankfurt hit the lowest record since COVID-19 in late 2020. Moreover, the Italian index experience a 6.2% drop following the Russia and Ukraine crisis.

Similarly, the US stock exchange market experiences the impact of Russias inversion in Ukraine. The S&P 500 experience a tremendous one-day collapse since it happened in May 2020. The continuation of the war presents confusion to the stock markets because it is difficult to predict when it might end the impact it will have on the economy. Furthermore, the conflict made the S&P 500 record its highest drop of over 10% from its recent peak (Costola & Lorusso, 2022). However, the impacts reversed, making the US market bounce back. The complication is a result of the fear of uncertainty investors have concerning the future of the market.

The implementation of sanctions on Russia contributed to the downward pressure on the US stock market. Generally, most US firms operating in Russia partially or fully halted their business operations. This aspect caused fear of reduced revenue amongst the key investors in such companies as MacDonalds, PepsiCo, Apple, Starbucks, and Coca-Cola. As the number of companies boycotting Russia increases, the stock market prices are dropping continuously. The market volatility is expected to remain as the war rages in Eastern Europe.

The situation made nervous investors undertake few chances fearing the growing tension and the escalation of the crisis in the stock market. Currently, most stockholders flee the stock market to seek a safe haven in investments regarded as safer, such as the dollar and yen currencies, government bonds, and gold. For instance, during the inversion of Ukraine, the 10-year bond for the British government recorded the most significant rise at the initial stage of the war in more than the past ten years. The demand for gilts increased their yields to the investors compared to 2011. Therefore they become safe and valuable commodity to invest on.

The war had a significant negative impact on the currency market in Europe. During the first week of the inversion, the euro dropped below $1.10, a record last encountered in two years. The decline made the currency lose over 3% against the US dollar (Costola & Lorusso, 2022). Furthermore, the fall caused the euro to make losses compared to the Swiss franc. These changes in the currency market clearly indicate the ravaging impacts of the conflict on the economy, especially volatile financial institutions.

Contrary to the fall of stock prices, energy and mining stocks have experienced a surge in commodity market prices. For instance, the cost of Brent crude reached $120 per barrel, which was then followed by a sudden increase to $125 (Adekoya et al., 2022). The rise in prices was caused majorly by the fear of a reduction in the supply of the product due to the ongoing war in Eastern Europe. The effect made the commodity market experience a significant increase in the value of items sold on the platform. The rise in the Brent crude price reached 21% during the initial stages of the military conflict (Adekoya et al., 2022). This was the highest level recorded in energy since the year 2013. The impact was caused by the buyers choice to snub buying Russian oil supplies that constitute over 5 million barrels daily. The aspect fuelled the surging energy costs across the world.

Similarly, the prices of gases increased in Europe due to the ongoing military invasion of Ukraine. After a few weeks of the war, the cost of European gas hit an astonishing 120% gain per week. That implies that the price per megawatt-hour rose to about 208 euros, the highest record ever attained in the history of the commodity (Mammadov, 2022). The shocking charges are caused by the sanction of the Russian products in the European market. Since Russia produces the largest volume of natural gases, the restriction leads to low supply, thus increasing demand hence shooting prices high.

The prices of other raw materials, such as wheat and metals, have also increased in the market. The continuous Western sanctions have made it challenging to transport commodities produced within the territory of Russia. Being the most of what is grown in Ukraine and Russia, the war made it difficult to export such essential items to overseas markets, causing limited supply. The shortage of such commodities resulted in an increase in their prices in the market. For instance, since the war broke in Eastern Europe, the charges of wheat in the commodities market have scaled to about 40%, a record last experience over ten years ago (Mammadov, 2022). Similarly, the prices of Aluminum and copper, which are mainly supplied by Russia, hit the highest peak in the commodity market. These occurrences are due to the limitation inflicted on the Russian ability to supply the materials to European markets.

In addition, financial intermediaries such as the European banks experienced a fall in their stocks during the start of the Russia-Ukraine conflict. The Western sanctions subjected to Russia made the institutions realize a worsening macroeconomic system. The banking system fell by over 16%, making it the worst period since the beginning of the pandemic in 2020. Most of Russias shares, such as Frances SocGen and Austrias Raiffeisen, encountered a significant reduction during the initial period. Moreover, the prevention of Russian banks from using the SWIFT banking system is a blow to the institutions. The approach will make the financial intermediaries establish another effective method of transferring the money across other nations. In the meantime, the efficacy and impacts on their stock are surging, making the market prices fall below the expected standards. The restrictions have made it challenging for the banks to operate effectively in the financial market.

The invasion of Ukraine made the Moscow stock exchange market remain inactive for over a week. The decision resulted in a decline in the value of the ruble to the lowest record. The overwhelming sanctions by the western countries on Russia have further intensified the rate of the ruble fall. During the initial week of the war, the value of the ruble against the dollar reached 118.35 per dollar (Huang & Lu, 2022). It, therefore, implies the conflict caused the Russian currency to depreciate in the market, thus losing its purchasing power compared to other denominations. Russias ruble has experienced a decrease of almost 30% offshore trade and about 20% within Moscow (Huang & Lu, 2022). This indicates how the currency is significantly disconnected from the worlds financial market due to countermeasures to curb and reduce the Russian invasion of Ukraine.

The Ukraine government bonds and currency received the intensity of the war as most investors feared the impact of the conflict on the countrys economy. Both the commodity and stock market crashed, making the stockholders question the ability of the nation to avoid such sovereign defaults. During the invasion of Ukraine, the Military suspended all the commercial shipping situated along its ports to reduce the impact of Russian attacks. The measure caused fear of disruption of the supply of oilseeds and essential stuff produced within the country. The caution has made the overall prices of such commodities hit high records in the markets.

In addition, the banking institutions in Ukraine crashed following the intensity of the invasion. The effect made the intermediaries lose value in the financial market since most investors shifted to invest in securities that guarantee minimal risks. Furthermore, their stock level in the market drops suddenly, leaving them to experience a record low in the history of the nation. Therefore, the war drastically affected the growth of the financial institutions in the country.

The tension caused by the current war and the need of countries such as Russia to curb the effects of inflation has prompted the central bank to increase the interest rates. This practice aims to counter the devaluation of the ruble by attracting more foreign capital into the country. In relation to the price of gold, as the currencies depreciate, the value of gold appreciates. Due to the demand to have a secure store of wealth, many investors will have opted for the commodity, thus making its price rise. Similarly, Russias interest rate has made stockholders sell the Russian dollar-denominated securities such as bonds. This approach to finding safety investment has caused the yields of US treasury bonds to decline due to high demand from investors willing to purchase safe assets.

Conclusion

In summary, financial markets and intermediaries are prone to the effects of war. When the supply of commodities is affected following political unrest, the respective prices hit a record-breaking high. The current military invasion in Ukraine has affected the stock, currency, commodities, and bond market across the globe. Natural resources such as oil, gas, and other products, including wheat, Aluminum, and copper, have attained the highest price due to the conflict. Measures such as sanctions have induced pressure on Russian banks, making them lose the ability to operate using the SWIFT messaging approach. Moreover, the Russian currency, the ruble, has depreciated following the step by the central bank to increase interest rates. The practice has caused devaluation of the money as compared to other currencies.

References

Adekoya, O., Oliyide, J. A., & Yaya, O. S. (2022). Does oil connect differently with prominent assets during war? Evidence from intra-day data during the Russia-Ukraine saga. Evidence from Intra-Day Data During the Russia-Ukraine Saga.

Burggraf, T., Fendel, R., & Huynh, T. L. D. (2020). Political news and stock prices: Evidence from Trumps trade war. Applied Economics Letters, 27(18), 1485-1488.

Costola, M., & Lorusso, M. (2022). Spillovers among energy commodities and the Russian stock market. Journal of Commodity Markets, 100249.

Huang, L., & Lu, F. (2022). The Cost of Russian Sanctions on the Global Equity Markets. Available at SSRN 4060927.

Jiang, F., Jiang, Z., & Kim, K. A. (2020). Capital markets, financial institutions, and corporate finance in China. Journal of Corporate Finance, 63, 101309.

Madura, J. (2020). Financial markets & institutions. Cengage learning.

Mammadov, E. (2022). The Economic Consequences of Russia-Ukraine War for Azerbaijan. Available at SSRN 4058963.

Purewal, K., & Haini, H. (2021). Re-examining the effect of financial markets and institutions on economic growth: Evidence from the OECD countries. Economic Change and Restructuring, 1-23.

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