Global Capital Market Prompts for War-Risk Aversion

On February 24, the condition in Ukraine deteriorated and escalated, directly impacting the global capital market.

That day, almost all global stock markets experienced a wild day. Asia-Pacific stock markets closed first, with the Nikkei down 1.81%, the Korea KOSPI down 2.60%, Australia’s S&P/ASX 200 Index down 2.99%, the FTSE Singapore Straits All-share Index fell 4.15%, the Hong Kong’s Hang Seng Index dived 3.21%, and the Shanghai Stock Exchange Composite Index down 1.66 %. The three major U.S. stock indexes fell sharply at the opening — the Dow Jones Index fell 2.4%, the S&P 500 Index down 2.5%, and the Nasdaq Composite Index dropped 3.4%. The European stock markets fell even more at the opening, with the German stocks down 3.6%, the French stocks fell 3.38%, the U.K. stocks down 2.49%, the Euro Stoxx 50 dropped 4.62%, and the Russian stock markets continued to decline after slumping 30% at the opening.

While the global stock markets tumble, oil and gold markets were notably bullish. Information reveals that the price of Brent Crude Oil exceeded USD 100 for the first time in eight years, rising to a high since 2014. The price of spot gold stood at USD 1,960, a new high since September 2020. The gold price has risen about 8% from February, the largest monthly gain since July 2020. The escalating tension also hit the foreign exchange market. As European currencies such as the British Pound and the Euro fell, the U.S. Dollar index soared by 1.06% to a new high of 97.229 since January 31. The Japanese Yen performed even better, and its exchange rate against the U.S. Dollar rose to 114.63.

At present, a sharp contrast has emerged between the global stock market, oil, gold, foreign exchange market, and even the trends of its internal sub-commodities; the mechanism of change is obviously different from before. At that time, the condition in Russia and Ukraine remained unclear, and the potential war was only a risk factor. This uncertainty caused some changes in the capital market, even if they might have been directional, they were often accompanied by large two-way fluctuations. With the escalation of crisis in Ukraine, the short-term variability becomes even more prominent. Overall, there has been no substantive change in the data of major economies in recent time. Over the concern about the alarming condition between Russia and Ukraine and the urgent tightening of Federal Reserve’s policy, market changes are now more driven by sentiment. Given the worsening situation in the Russia-Ukraine conflicts, the potential risks become more and more apparent. Investors become more rational and prefer risk-averse assets. A report by Goldman Sachs points out that global markets are already pricing for geopolitical risks. If the situation deteriorates, risk premiums in all markets could rise even further. This trend might persist for a time in the global capital market.

Regarding this persistent pattern, from the more typical local conflicts since the 1990s, engaging the global asset prices in the United States and Russia like the Crimea incident in 2014, some Chinese institutions concluded that, the outbreak of geopolitical conflicts suppressed risk appetite for a short run. This would cause disturbances to the market, benefiting safe-haven assets though harming risk assets. In the medium and long term, the course of the original trend would not change much. For instance, in the past five decades of geopolitical crises, only two had caused a lasting damage to the global stock markets, i.e., the fourth Middle East war and the Gulf War. As long as the Russia’s oil and gas exports are not embargoed, the Russia-Ukraine conflict would only lead to a temporary fall in the stock market. With Russia and Ukraine as the important energy and grain exporters, the conflict might further push up the prices of commodities including oil, natural gas, and grain for a short term only. From the previous historical experience, therefore, the impacts of the geopolitical conflicts on the financial markets are likely to be short-term based. As time goes by, the safe-haven assets that were pushed higher might soon return to their original price range.

According to researchers at ANBOUND, the escalation of the Russian-Ukrainian crisis into a war is unlikely to be resolved in this short time. With the current level of conflict, it is not easy for the condition to calm down. The global geopolitical tensions are likely to continue for a long time, and the global financial market turmoil would also persist. Under the turbulent condition, a sense of insecurity might prompt some Eastern European countries to lean closer towards the United States. The rift between the European Union and Russia will be inevitably deepened. Geopolitical tensions would further cause the United States and Europe to jointly confront Russia. The impacts of this will far exceed any local war. Whether it falls into a cold war or a hot war, the conflict would significantly worsen the regular international economic and trade order. At that time, it will not only affect the global capital market, but also the fundamentals of world economic development.

How would all of these impact China’s capital market? ANBOUND has previously mentioned that stability is imperative in retaining local competitiveness against an unstable global capital market. If this is achieved, China’s market may continue to attract foreign capital. Moreover, the Chinese economy has a better economic fundamental as compared to some developed and developing countries. The asset valuation including stock market is at a low level, making it attractive to globalized and safe-haven funds to flow into China. If China could maintain a stable and open financial market, it will become a potential market for international capital to carefully consider .

Final analysis conclusion:

The deterioration and escalation of the conflict between Russia and Ukraine has provoked the global capital market to prompt for war-risk aversion. This shift of pattern will likely continue for a long time. This presents certain opportunities for China, so long as it commits on a sound market and economic fundamental, along with a stable and open financial market. This will help the country to attract more foreign capital inflows to stimulate the current development of its capital market.

Writer by ANBOUND
ANBOUND is a multinational independent think tank. We specialize in public policy research covering geopolitics and international relations, urban and social development, industrial issues, and macro-economy. We enjoy professional reputation in the areas of strategic forecasting, policy solutions, and risk analysis. Over the past three decades, we are committed to independence and openness as our operating principles.

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ANBOUND is a multinational independent think tank, specializing in public policy research, incl. economy, urban and industry, geopolitical issues. Est. 1993.

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ANBOUND is a multinational independent think tank, specializing in public policy research, incl. economy, urban and industry, geopolitical issues. Est. 1993.

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