The drums of war began to resonate in Europe at high volume and everyone is preparing for a possible flare-up.
The question is how will such a war affect economically on inflation, commodities, stock markets, and bonds.
The Russian invasion of Ukraine, according to estimates, is almost an increased fact. Estimates rose on Friday after White House National Security Adviser Jake Sullivan said on Friday that a Russian attack on Ukraine could “occur any day”, which led to falls in leading Wall Street indices.
Countries are evacuating their citizens from Ukraine, and American warnings are escalating. Such an invasion has many effects, above all the most serious consequence of war is human life and bloodshed in vain. It will also undermine great political stability in the Europe area and around the rest of the world, and in addition, there are also far-reaching economic impacts, apart from the direct impact on the Ukrainian economy that is likely to collapse almost immediately.
Energy and commodity prices can increase.
The first area that will hit immediately is the energy area since Russia controls a part of it and they can cut the supply chain. Analysts already anticipate a rise in the price of oil to $ 120, and in the initial phase, they will almost certainly cross the $ 100 barrel mark for the first time in years. In addition, Russia is a major gas supplier to Europe, and gas prices are expected to rise sharply. increasing energy prices will, of course, hit Europe first and foremost, which is facing extremely low gas and oil reserves and tight energy prices. Rising prices could hurt the European economy with rising production prices, declining consumption of citizens who have difficulty meeting electricity prices, which are at all-time highs, and more. In the worst-case scenario, in which gas and oil supplies from Russia will cease all at once, a real and acute crisis is expected immediately.
So Europe will be hurt for sure, does the rest of the world will be hurt as well. Some economists believe that in the worst-case scenario, a global recession is expected as a result of the rise in energy prices. They rely on a similar scenario from the 1970s when the oil price crisis caused a global recession. At the same time, fifty years after that crisis, the world is a little more flexible in terms of energy production, and it is precisely here that the development of alternative means of energy that have advanced greatly in recent years may help to overcome the crisis. In addition, the world’s dependence on Arab oil was much higher than that of the world today on Russian oil.
The prices rise in energy and commodity prices is expected to have a secondary impact on the second sensitive point that is making the world markets crazy these days. . Energy prices, apart from the direct impact on inflation as a key component of the consumer price index Energy, farmers, maritime and land transport – for all the costs will jump, and at least part of the increase in production and transport costs will eventually be passed on to consumers, which in turn will increase the infection even more.
The Government Bonds of the United States are considered safe in times of crisis and market uncertainty.
Therefore, it is no wonder that bond prices have risen, meaning yields have fallen as investors have sought a safer place to park their money in light of global developments. However, this happened after yields crossed the 2% threshold for the first time in a long time on Thursday.
The reason for the rise in yields on Thursday is of course the rise in the consumer price index and the expectation that the Fed will subsequently be forced to raise interest rates more aggressively.
If so, we have two opposing effects. Increasing instability can lead to an increase in demand and a decrease in yields, on the other hand, an increase in inflation may lead to an increase in yields.
Keep in mind that the yield on U.S. bonds affects the prices of other bonds in the private market in the United States, and even worldwide. In addition, they have an almost direct impact even on the stock market.
What disappears in this equation is the behavior of the Fed. Will a Russian invasion cause the Fed to consider its steps more moderately in light of global instability? Perhaps similar to the Corona crisis, in which the Fed saw a reason for market intervention and a very broad monetary policy, it will also see a development in Europe as a reason for market support? Or will the historical inflation figures, which at the moment seem unstoppable without an aggressive move, leave him no choice but to continue with his features of raising interest rates and reducing monetary expansion? An analyst at a famous investment firm said if Ukraine attacks it will add more confidence to our view that the Fed will be more June than what markets think when war causes uncertainty to rise even more.
More, the leading estimates in the market are that the Fed has not really been left with a choice in the face of the real inflation threat that has not been seen for decades.
If there is one thing the stock market hates most – it is uncertainty, and that is exactly what the war means.
At the same time studies show that external events affect the stock market in the short term, but in the long run, the market tends to overcome them.