Markets panic as Putin launches “military operation”

Are Putin’s plans becoming clearer?

The end game of Vladimir Putin seems to be crystallising. But that’s not making things any easier to predict and price-in for market participants. Explosions were reported in Kiev a few hours ago, and based on US intelligence and the innuendo in the rhetoric of Putin, a full scale invasion targeting the capital is imminent or underway. This is very significant, because it points to a plan of not (just) a land grab from Russia, but an overthrow of the Ukrainian Government. Russian forces are lined up along the border of Belarus and if they make a move on the capital, it indicates a possibly protracted and bloody civil war which could render Ukraine – in the worst set of outcomes – a failed state.

A civil war could be a major growth and inflation shock

Of course, these things could de-escalate. However, for now, everything seems to be moving in the one direction. A civil war would be both a huge growth shock to the European – and global – economy and another inflation shock. That’s a dangerous mix, because the supply disruptions in commodity prices would drive costs higher, and exacerbate the inflation central banks are already struggling to contain. That means despite this the Fed – and others – would be unable to buffet the shock, and would potentially have to tighten policy into weakening economic conditions – a very negative scenario for risk assets.

Stocks to extend drop; oil and gold rip

IG’s prices are pointing to a steep drop for stocks tonight, with deeper selling possibly on the cards in recent days, especially in European equities and stocks sensitive to higher global rates, like tech and growth stocks – the NASDAQ has fallen into bear market territory. Another shock to global energy markets is looming too. Brent Crude has cracked $US100, with concerns building of reduced gas supply in Europe, as Russia looks to potentially choke the Eurozone economy, driving energy prices up. Gold remains the investor play of choice for the Russia-Ukraine conflict however, with the escalation in violence today only opening the door to greater sanctions on Russia from the West.