Vladimir Putin flexes muscles over Ukraine, markets wither

Written by fe Bureau | New Delhi | Updated: Mar 4 2014, 10:38am hrs
Fears of armed conflict between Russia and Ukraine spooked global markets on Monday, dragging down stocks and driving up commodities to multi-month highs as concerns over supplies of some energy and farm items intensified.

The MSCI All-Country World Index lost 0.7% at 6 am in New York and the MSCI Emerging Markets Index dropped 1.3% in its biggest monthly fall.

Standard & Poors 500 Index futures tumbled 0.9% while European shares shed the most in a month with the Stoxx Europe 600 Index dropping 1.9%.

Russian stocks hit their lowest since 2009, losing 13% in a single session as Ukraines Eurobonds crashed to a record low.

However, the yen and treasuries gained while gold edged up to its loftiest in four months during intra-day trade on a surge in investor interest in safe haven assets.

At home, the Sensex ended 173.47 points, or 0.82%, lower to settle at 20,946.65 points, while the NSEs Nifty ended 55.50 points, or 0.88%, lower at 6,221.45 points.

The rouble hit its all-time low of 42.6948 against the central banks target basket for the dollar and the euro, prompting Bank Rossii to raise its main interest rate the most since 1998, by 150 basis points, to prop up the currency.

However, the yen and the dollar gained.

The rupee, too, was affected by the crisis and ended weaker at 62.04/05 versus Fridays 61.75/76. The benchmark 10-year bond yield closed up 4 basis points at 8.90%.

Any escalation of the crisis can potentially dampen strong dollar inflows into local stocks and debt, which totalled over $2 billion in February, and helped push the rupee to its highest in more than a month on Friday.

The Thomson Reuters-Jefferies CRB index, which tracks the price movement of 19 commodities, hit its highest since October 2012, having gained 1.1% to 306.07 by 7 pm. Among industrial and farm commodities, brent crude oil hit a two-month high, US crude rose to an over six-month peak in intra-day trade, wheat jumped to a two-and-half-month high and corn scaled the peak in six months.

India doesn't face much of a threat from impending Russian invasion of its western neighbour as it has adequate domestic grains, although any spike in brent crude oil and fertiliser prices could hurt. The country imports more than 70% of its crude oil and 20-25% of its urea needs and could face a spill-over effect of any rise in global prices of these commodities.

However, analysts don't see any supply disruptions as India imports only about two million tonnes of crude oil from Russia, a small fraction of close to 170 million tonnes of annual overseas purchases.

State-owned upstream oil and gas major ONGC has significant business interests in Russia through its overseas arm, ONGC Videsh, which acquired Russia's Imperial Energy a few years ago. OVL is also in talks to acquire more oil and gas fields in Russia and its territorial waters. The Indian state-owned firm may now examine the prospect of such acquisition in the light of conflicts in the region. Senior ONGC officials did not immediately offer a comment.

Of course, the Indian stock markets will not remain insulated if tensions escalate. The Ukraine issue is one among several global issues which will influence the market sentiment at least till the (upcoming Parliament) polls, said Lalit Nambiar, fund manager & head (research), UTI Mutual Fund.

Since Russia is the world's largest energy producer and Ukraine hosts a network of Soviet-era pipelines which carry more than a half of its gas to the EU, any disruption of supply puts Europe's energy security at risk. Moreover, Russia and Ukraine together account for roughly 40% of global grain exports, mainly wheat, and Ukraine is the world's largest urea exporter. Analysts said if the tension escalates resulting in a squeeze in grain supplies, especially from Ukraine, food prices in its leading importer Europe will jump.

According to the US administration, Russian forces had complete operational control of the Crimean peninsula by late Sunday, in a conflict worsened by a seizure of power by a pro-West group in Ukraine overthrowing its Russia-backed president Viktor Yanukovych, who fled to Russia after three months of street protests against his rule. Analysts say Russia's response was triggered by the ouster of Yanukovych, which, it fears, could result in its neighbour becoming a possible NATO or EU member.

US secretary of state John Kerry is traveling to Ukraine on Monday as developed nations seek to respond to the crisis after Russian president Vladimir Putin won permission from his parliament to use force to defend Russian interests in Ukraine, rejecting Western pleas against military intervention.

We are not currently importing from Ukraine. But since Ukraine is the world's largest exporter of urea, the international markets will be under pressure. Hence, we may see an artificial rise in urea prices globally, which could have some spill-over impact on India. But as of now, there is no impact on us, said S Nand, deputy director-general at the Fertiliser Association of India. The country imports eight million tonnes of urea a year.

US stock-index futures fell after the S&P 500 gained 4.3% last month, the most since October. Options tied to gains in the benchmark gauge for American stock volatility reached the highest prices in six years last week, reflecting bets that the calm prevailing in equities for the last year wont last.

A Nomura report said the developments have broadened the scope for markets to price in the tail-risk of dramatic escalation as protracted uncertainty and bellicose posturing draw out. Given this reality, it seems sensible to seek protection in risk-off markets (long gold, long energy commodities and long call option s in the dollar, and increased discretion/caution around emerging market assets...); we see this more as a way to position for the market's likely response than the direct tails risks themselves, it said. Spot gold hit $1,350.00 an ounce in early trade, its highest since October 30, and was trading at $1,345.86, up 1.5% by 1237 GMT. April gold futures gained $24.30 at $1,345.90 an ounce.

Natural gas rose as much as 10% to 61.95 pence a therm in intra-day trade, the sharpest gain since September 30, 2011, on the ICE Futures Europe exchange in London. Brent crude hit $112.10 per barrel, its highest since December 30, before easing to $111.97 by 1245 GMT, still up $2.90. US crude gained as much as $2.16 to $104.75 a barrel, the maximum since September 23 last year, before falling to $104.50.

Wheat on Chicago Board of Trade for May delivery gained 5.2% at $6.33-3/4 a bushel, having hit $6.38 earlier in the session, the highest since mid-December. May Corn on CBOT rose 3.8% at $4.81 a bushel, after scaling its peak since mid-September $4.82-3/4.

The yen climbed to 101.28 per dollar after reaching 101.26, the strongest level since Feb. 6. It jumped 0.7% to 139.49 per euro. The 18-nation shared currency slipped 0.2% to $1.3774.

US 10-year yields dropped four basis points to 2.61%, while Australias 10-year yield slid four basis points to 3.98% and Japans fell to 0.57%, the lowest level since last May. Germanys 10-year yield lost six basis points to 1.57% after falling to 1.55% on February 27, the lowest since July 24.

Any escalation of the crisis can potentially dampen strong dollar inflows into local stocks and debt, which totalled over $2 billion in February, and helped push the rupee to its highest in more than a month on Friday.

The Thomson Reuters-Jefferies CRB index, which tracks the price movement of 19 commodities, hit its highest since October 2012, having gained 1.1% to 306.07 by 7 pm. Among industrial and farm commodities, brent crude oil hit a two-month high, US crude rose to an over six-month peak in intra-day trade, wheat jumped to a two-and-half-month high and corn scaled the peak in six months.

India doesnt face much of a threat from impending Russian invasion of its western neighbour as it has adequate domestic grains, although any spike in brent crude oil and fertiliser prices could hurt. The country imports more than 70% of its crude oil and 20-25% of its urea needs and could face a spill-over effect of any rise in global prices of these commodities.

However, analysts dont see any supply disruptions as India imports only about two million tonnes of crude oil from Russia, a small fraction of close to 170 million tonnes of annual overseas purchases.

State-owned upstream oil and gas major ONGC has significant business interests in Russia through its overseas arm, ONGC Videsh, which acquired Russias Imperial Energy a few years ago. OVL is also in talks to acquire more oil and gas fields in Russia and its territorial waters. The Indian state-owned firm may now examine the prospect of such acquisition in the light of conflicts in the region. Senior ONGC officials did not immediately offer a comment.

Of course, the Indian stock markets will not remain insulated if tensions escalate. The Ukraine issue is one among several global issues which will influence the market sentiment at least till the (upcoming Parliament) polls, said Lalit Nambiar, fund manager & head (research), UTI Mutual Fund.

Since Russia is the worlds largest energy producer and Ukraine hosts a network of Soviet-era pipelines which carry more than a half of its gas to the EU, any disruption of supply puts Europes energy security at risk. Moreover, Russia and Ukraine together account for roughly 40% of global grain exports, mainly wheat, and Ukraine is the worlds largest urea exporter. Analysts said if the tension escalates resulting in a squeeze in grain supplies, especially from Ukraine, food prices in its leading importer Europe will jump.

According to the US administration, Russian forces had complete operational control of the Crimean peninsula by late Sunday, in a conflict worsened by a seizure of power by a pro-West group in Ukraine overthrowing its Russia-backed president Viktor Yanukovych, who fled to Russia after three months of street protests against his rule. Analysts say Russias response was triggered by the ouster of Yanukovych, which, it fears, could result in its neighbour becoming a possible NATO or EU member.

US secretary of state John Kerry is traveling to Ukraine on Monday as developed nations seek to respond to the crisis after Russian president Vladimir Putin won permission from his parliament to use force to defend Russian interests in Ukraine, rejecting Western pleas against military intervention.

We are not currently importing from Ukraine. But since Ukraine is the worlds largest exporter of urea, the international markets will be under pressure. Hence, we may see an artificial rise in urea prices globally, which could have some spill-over impact on India. But as of now, there is no impact on us, said S Nand, deputy director-general at the Fertiliser Association of India. The country imports eight million tonnes of urea a year.

US stock-index futures fell after the S&P 500 gained 4.3% last month, the most since October. Options tied to gains in the benchmark gauge for American stock volatility reached the highest prices in six years last week, reflecting bets that the calm prevailing in equities for the last year wont last.

A Nomura report said the developments have broadened the scope for markets to price in the tail-risk of dramatic escalation as protracted uncertainty and bellicose posturing draw out. Given this reality, it seems sensible to seek protection in risk-off markets (long gold, long energy commodities and long call option s in the dollar, and increased discretion/caution around emerging market assets...); we see this more as a way to position for the markets likely response than the direct tails risks themselves, it said.

Spot gold hit $1,350.00 an ounce in early trade, its highest since October 30, and was trading at $1,345.86, up 1.5% by 1237 GMT. April gold futures gained $24.30 at $1,345.90 an ounce.

Natural gas rose as much as 10% to 61.95 pence a therm in intra-day trade, the sharpest gain since September 30, 2011, on the ICE Futures Europe exchange in London. Brent crude hit $112.10 per barrel, its highest since December 30, before easing to $111.97 by 1245 GMT, still up $2.90. US crude gained as much as $2.16 to $104.75 a barrel, the maximum since September 23 last year, before falling to $104.50.

Wheat on Chicago Board of Trade for May delivery gained 5.2% at $6.33-3/4 a bushel, having hit $6.38 earlier in the session, the highest since mid-December. May Corn on CBOT rose 3.8% at $4.81 a bushel, after scaling its peak since mid-September $4.82-3/4.

The yen climbed to 101.28 per dollar after reaching 101.26, the strongest level since Feb. 6. It jumped 0.7% to 139.49 per euro. The 18-nation shared currency slipped 0.2% to $1.3774.

US 10-year yields dropped four basis points to 2.61%, while Australias 10-year yield slid four basis points to 3.98% and Japans fell to 0.57%, the lowest level since last May. Germanys 10-year yield lost six basis points to 1.57% after falling to 1.55% on February 27, the lowest since July 24.