European stocks sold off and traders rushed into safe-haven assets on Monday as German Chancellor Olaf Scholz prepared to visit Moscow in a renewed effort to dissuade Russia from launching an invasion of Ukraine.
The regional Stoxx Europe 600 index fell 2.8% in afternoon trading, in a broad decline. Germany’s Xetra Dax fell around 3.3%, with steeper declines for exchanges in Austria, Sweden, Denmark and Greece.
Monday’s drop came after US national security adviser Jake Sullivan said on Sunday that a Russian attack on Ukraine could begin “any day” including “this week. before the end of the Olympics.
Futures markets implied that Wall Street’s S&P 500 stock index, which closed down nearly 2% on Friday after the White House issued its first warning of an ‘immediate threat’ of invasion, would fall further 0.9% on Monday.
Western countries continue to withdraw diplomatic and military personnel from Ukraine, and airlines have canceled flights to the country, rattling investors who had focused on US monetary policy while viewing geopolitical tensions as less risky.
“The market got off on the wrong foot,” said Altaf Kassam, head of investment strategy for Europe, Middle East and Africa at State Street Global Advisors. “People were expecting a de-escalation and it feels like things are going the other way.”
The potential effect of sanctions, he added, “would add to inflationary pressures as well as people’s perception of inflation.” Eurozone consumer price increases hit a record high last month, driven mainly by energy costs. Inflation hits 40-year high in the United States as the Federal Reserve prepares to raise interest rates from pandemic-era lows.
With global supply chains blocked by Covid-19, all major commodity markets are in a “severe state of exhaustion”, said Jeff Currie, head of commodities research at Goldman Sachs. “Such depleted systems are very vulnerable to even the smallest shocks, even [with just] a few days of disruption.
Scholz traveled to Kyiv on Monday before heading to Moscow on Tuesday. The German leader was to urge Putin to de-escalate the situation on the Ukrainian border and let it be known “how serious the consequences of an attack would be” in terms of sanctions against Russia, a senior official said.
Joe Biden spoke with his Ukrainian counterpart Volodymyr Zelensky on Sunday. The White House said the US president had made it clear that Washington would respond to Russian military action “quickly and aggressively”.
European natural gas contracts for delivery next month jumped 12% on Monday to €83.41 per megawatt hour. International oil benchmark Brent rose to $96.16 a barrel, the highest level in more than seven years, before paring gains.
“If Western claims of [a] Russian invasion of Ukraine proved unfounded [or] Russia has withdrawn its troops from its western borders, oil prices will crash,” said Tamas Varga of PVM Oil Associates, a broker. “At the moment all eyes are on Ukraine and the $100/barrel level.”
Top-rated government bonds rallied on Monday as traders sought shelter in lower-risk assets, pushing yields lower. The 10-year US Treasury yield fell 0.03 percentage points to 1.92%. In Europe, the benchmark 10-year German Bund yield fell 0.07 percentage points to just under 0.21%. The equivalent yield on the UK gilt fell 0.05 percentage point to 1.47%.
In contrast, Russian and Ukrainian government bonds fell to 2022 lows.
Ukraine’s dollar bond maturing in 2032 fell more than 10% to 77 cents on the dollar. Bonds denominated in Russian dollars were down around 2%, with the yield on a bond maturing in 2047 rising 0.15 percentage points to 4.93%.
In Asia, Hong Kong’s benchmark Hang Seng fell 1.4%, while Japan’s Topix and South Korea’s Kospi both closed down 1.6%.
Additional reporting by Tommy Stubbington in London
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