Boris pleads Putin to U-turn on 'disastrous' invasion plan
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Oil and gas prices surged over growing fears that Vladimir Putin could cut off supplies of gas to Europe in retaliation for sanctions imposed following any military action. The US has threatened to block the controversial Nord Stream 2 pipeline to Germany in the event of war.
The FTSE 100 dropped almost two percent in early trading while the FTSE 250 also fell.
News that The World Bank is temporarily relocating its staff added to fears of military aggression by Russia.
Germany’s Dax fell 3.7 percent, while Italy’s FTSE MiB, France’s Cac and Spain’s Ibex all went down by around 3.5 percent.
It drove the price of Brent crude oil to above $96 (£71) a barrel for the first time since September 2014, before easing back to $94.
The US dollar hit a two-week high, while another safe haven, government bonds, were in demand. Gold rose 0.62 percent to $1,870 and is now up 2.32 percent over the past month.
Morgan Stanley analyst Michael Wilson warned of a “polar vortex for the economy and earnings”, saying that a spike in energy prices would destroy demand and “perhaps tip several economies into an outright recession”.
However, the FTSE, European stocks and US futures recouped some of their losses after Russia’s foreign minister Sergey Lavrov said there is a “chance” for progress in talks – while the Kremlin said Ukraine renouncing its intention to join Nato may stop an invasion.
Traders are hoping a diplomatic solution can ease tensions, said David Jones, chief market strategist at Capital.com, but he added: “Sentiment this week will remain on a knife-edge due to the ongoing geopolitical unrest.”
Chris Beauchamp, chief market analyst at online trading platform IG, said while efforts continue to resolve the situation, there is no actual solution in sight. “It looks like the weakness in stocks will be with us for a while yet.”
Just as the Covid storm recedes, Ukraine has emerged to unnerve investors, said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
“Energy markets are on edge and if supplies are threatened there is a risk oil will shoot up even higher.”
Streeter said a fresh surge in European gas prices would intensify the cost-of-living squeeze and hit consumer confidence.
Yesterday, airlines and travel stocks bore the brunt of the damage, said Victoria Scholar, head of investments at Interactive Investor, who added: “There is no let up for travel stocks, which are still reeling from Covid travel restrictions.”
Low-cost carrier Wizz Air, which is Hungarian-owned but listed on the FTSE 250, fell more than nine percent in early trading while FTSE 100-listed Ryanair dropped more than eight percent. British Airways owner IAG was down more than seven percent.
Shares in aircraft engine maker Rolls-Royce, which has been hit hard by the pandemic, also tumbled.
Gold miner Fresnillo was a rare climber – but FTSE 100-listed Evraz, which has operations in Russia and Ukraine, plunged almost 30 percent over sanctions fears, hitting Roman Abramovich, who bought a 41 percent stake in 2006.
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The first major war in Europe in 70 years is not the only danger for stock markets, said Fawad Razaqzada, market analyst at Think Markets. “Inflation is the elephant in the room as markets wait to see how central banks address surging price growth.”
The US Federal Reserve is expected to increase base rates in March, possibly by 0.5 percent.
Richard Carter, head of fixed interest research at Quilter Cheviot, said: “Investors are already very worried by rising inflation and interest rates, so this comes at a particularly bad time.”
Aziz Alnaim, of the Mayar Responsible Global Equity Fund, said investors should not panic and sell because there is always something to worry about. “Currently it is the escalating Russia/Ukraine conflict, but prior to that it was the pandemic, prior to that the impact of a US/China trade war, and on and on it goes. Shares still rise.”
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