Russia’s invasion of Ukraine has added another dimension to a volatile start to equity markets in 2022. For the month of February, the All-Ordinaries index closed the month 0.8% higher at 7,323.2 points. The Australian Dollar gained by 2.7% for the month with 1 Australian Dollar currently buying 72.63 United States cents.
The Reserve Bank of Australia (RBA) kept the official Cash Rate at 0.1% per annum in February, with no change expected at today’s RBA’s board meeting announcement.
Global share market results were weaker in February, with the United States Dow Jones index falling by 3.5%, the London FTSE falling by 0.1%, the Japan Nikkei 225 falling by 1.8% and the Hong Kong Hang Seng Index falling by 4.6% for the month.
The escalation of the situation in the Ukraine has already caused an increase in risk in financial markets. More volatility seems likely in the days and weeks ahead, especially given the severity of the new sanctions imposed on Russia over the weekend.
These sanctions include restrictions on Russian access to the SWIFT system of international payment messaging, which will hamper Russia’s ability to earn export receipts and pay for imports.
In response to the sanctions (and footage of Russian customers forming long queues to withdraw cash from ATMs), Russia's central bank was forced to increase the amount of money it supplies to ATMs and raised its key interest rate from 9.5% to 20% to shore up its currency after it plunged 30% to a record low against the United States Dollar as shown in the chart below.
These new sanctions pose the risk of disruption to Russia’s significant exports of gas, oil and agricultural commodities, which would only exacerbate current upward pressure on global inflation. There is also the growing risk of spill over from likely extreme movements in Russian financial markets, and a potential Russian sovereign debt default.
There is significant uncertainty around how the conflict could unfold. The best-case scenario would be a Russian back down. Otherwise, protracted fighting or a Russian takeover will see continued sanctions and will add considerably to supply chain and inflation woes post COVID-19 lockdowns for some time.
Whilst no two situations are the same, history does suggest that geopolitical events tend to result in sharp share market sell offs, but also rebound quite quickly if economic growth is largely unaffected.
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This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.