How Will The Next Events Around Russia-Ukraine Conflict Affect Markets?

How Will The Next Events Around Russia-Ukraine Conflict Affect Markets?
  • Russia's denial of wanting to overthrow Ukraine's government has boosted the market mood.
  • Ongoing bombing, accusations of using biological weapons may come to haunt markets.
  • The safe-haven dollar and gold have room to recover after the recent slide.

All markets are saying, is give peace a chance – paraphrasing John Lennon's song, that is what is going on, with stocks and risk currencies rising while safe-haven assets are tumbling down. However, it may become worse before it becomes better.

The latest bout of optimism stems from Russia's statement that it does not seek to overthrow Ukraine's government and its preference to resolve differences via discussions. The Kremlin added that it has never threatened and does not threaten NATO.

These olive branches join Tuesday's news that Ukrainian President Volodymyr Zelenskyy signaled he is willing to give up NATO membership and the upcoming meeting of the two countries foreign ministers planned for Thursday in Turkey.

On the ground, a humanitarian ceasefire is in effect in several Ukrainian cities on Wednesday, and civilians are begin evacuated, so far safely.

Markets have reacted positively to these developments, with S&P futures jumping by 2%, EUR/USD jumping by some 80 pips, and safe havens such as gold and the dollar suffering significant falls.

Is the war nearing its end? Not so fast.

Reasons to worry

First, Russia continues bombing Kyiv and is likely using this day of relative calm to regroup and resupply its troops, which have suffered massive logistical failures. Several of the previous ceasefires were not respected and this may happen again.

Secondly, Russia's statements are also one that the US has declared economic war on it. Such comments contradict the better vibes that have previously boosted the market mood. Russia also accuses its enemy of developing biological weapons, in what seems like an excuse to intensify attacks.

Third, Ukrainian President Zelensky called on Russian troops to "surrender while you still can" and that "we will answer in full for all our killed people" – militant statements are not exclusive to one side.

The war will eventually end, hopefully, sooner rather than later. However, it seems overoptimistic to circle Wednesday as the beginning of the end, and that everything improves from here. Another escalation may come shortly, souring the market mood and boosting the safe-haven gold and dollar.

Moreover, with every day that passes, the damage to the global economy increases. While shortages of energy have yet to be seen – prices are rising without any stop in the flow of oil or gas – food issues may become a burden for the global economy. Russia and Ukraine produce a vast amount of wheat and barley, which are now blocked. That is already raising food prices.

And while the war continues, so do new Western sanctions. The EU has approved a new list of restrictions on Russian leaders and oligarchs, and also disconnect several Belarusian banks from the SWIFT payments system.

All in all, it will likely get worse before it becomes better and that means another rush to the dollar and gold.

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