War and Elections: One Up, One Down

The markets have been mad this month! First the markets were down 6%, and then they were up 5%. There’s excessive news-flow around the conflict between Russia and Ukraine, sanctions, commodities turning to a 10-year high, and then BJP sweeping elections.

But here’s decoding it all for you so you understand what next!

1. Why did the markets go down?

Active actions took place in 3 forms - war, sanctions and companies withdrawing from Russia.

• Markets don't like uncertainty, especially if its geopolitical, and of this scale, that too involving nations that are key players in this highly interconnected global market.

• The West is imposing sanctions on Russia to the extent that it is the hardest ever. Sanctions on countries aren’t new. But when they are imposed on one of the largest producers of oil for example, they hurt everyone, including those imposing sanctions.

• McDonalds, Netflix, PayPal, Apple and over 300 other companies have withdrawn from Russia, expressing their condemnation towards the attacks on Ukraine.

The impact of these active actions has been leading to one big worry - INFLATION

• Russia is amongst the top 5 leading oil exporters globally. And the US announced a halt on Russian oil imports. That’s led crude to go up 30% in the last couple of weeks.

• It is also heavy on natural gas. Europe depends on Russia for more than 40% of its energy needs. The EU said it would cut imports of Russian gas by two-thirds by the end of the year. Natural gas prices in Europe skyrocketed after to hit 345 euros per megawatt-hour - from 30 euros a year ago.

• Wheat prices are up more than 50%. Russia and Ukraine make up for a third of the global wheat exports.

• And the same story with several commodities like corn, nickel, titanium and palladium.

Inflation has anyway been a worry for a while now!

• US inflation was recorded at 7.9% - a 40-year high. This could remain persistently high as commodity prices globally soar.

• Higher inflation means lower consumption, lower corporate profits, higher interest rates, and pressure on markets.

2. Why did the markets go up?

• Ukraine dropped its pitch for NATO membership, which has been one of the key reasons for Russia’s aggression.

• The BJP clinched victory in 3 of the 5 states. These are taken as a general pointer towards the general elections in 2024.

• Investors gain visibility over the medium-term towards continued development and stability domestically.

What next?

• While the election result cause euphoria in the near-term, there are larger macroeconomic worries that continue to loom, and rather aggravate.

• Inflation is bad news for the markets in the near term. It will impact both consumption and corporate profits, resulting in subdued performance of the markets.

• Inflationary pressures are likely to last as long as sanctions against Russia continue, and as long as the conflict continues hampering supplies.

• However, it is important to note that sanctions are a Catch-22 situation. They are meant to cripple the Russian economy and its ability to continue fighting. However, they impact everyone globally, especially at a time when inflation was already a problem.

• The conflict, and any consequences that will further fuel inflation are likely to weigh on the markets till resolution is in sight.