Oil shot back above US$100 a barrel and government debt rallied on Tuesday as fears increased over the impact of aggressive sanctions against Russia after its invasion of Ukraine, further depressing stocks in Europe and on Wall Street.
Russia’s equity markets remained suspended and some bond trading platforms were no longer showing prices, but dealing in the world’s major financial centers was orderly, albeit jittery.
The main stock indices in Germany, France, Italy and Spain closed down more than 3% while the pan-European STOXX 600 index fell 2.4%.
The Dow, S&P 500 and Nasdaq equity indexes all closed around 1.5% lower while U.S. and European banking indices were hit hard for a second day, falling about 5.6% each.
Canada’s benchmark stock index fell a more modest 0.58%, as a rally in energy and precious metals stocks helped to offset losses.
Yields on 10-year German bunds slid back into negative territory for the first time since late January and U.S. Treasuries dropped to five-week lows as prices, which move inversely to a bond’s yield, rallied on safe-haven buying.
The Canadian bond market saw similar moves, even as the latest gross domestic product data came in stronger than economists expected, cementing views that the Bank of Canada would hike interest rates on Wednesday for the first time since 2018. Canada’s 10-year yield was fetching 1.717% by late afternoon Tuesday, its lowest since the start of January.
The likelihood of a slowing global economy has led to concerns that the Federal Reserve and other central banks will not be as aggressive in hiking interest rates in coming months.
The yield on 10-year Treasury notes declined 11.8 basis points to 1.7207%, while Germany’s equivalent Bund fell 2.2 basis points to -0.091%.
The 10-year U.S. Treasury has fallen about 32 basis points from February 15, when it reached the highest peak since mid-2019. But so-called real yields, which account for the impact of inflation, have plunged 48 basis points.
That’s a dramatic move by historical standards.
“Going back to 2003, there have only been a handful of times when real rates fell at least as much in a two-week period, and only during crisis that put the global expansion at grave risk: the Great Financial Crisis, the Euro Area debt crisis, and the COVID-19 shutdown,” Sal Guatieri, senior economist at Bank of Montreal, said in a note.
“Markets suspect the Russia-Ukraine war is a similar threat.”
On the sixth day of Russia’s invasion of Ukraine, the disruption caused by sanctions have raised questions about the toll of the crisis on both global growth and inflation.
“If Russia controls more of Ukraine’s food and energy production capacity and those types of things, they may end up being more expensive for everyone around the world,” said Tom Simons, a money market economist at Jefferies in New York. “The economic consequences of it may be more long-lasting.”
Investors are acting rationally from a market standpoint, driving up oil, gas and commodity prices because they understand there could be supply chain disruptions, said Anthony Saglimbene, global markets strategist at Ameriprise Financial.
“Moving forward, though, there’s all these second- and third-derivative impacts that the market is still trying to figure out,” Saglimbene added. “When you cut Russia out of the global financial system, what are the ramifications for not only Russia, but stability across Europe right now?”
Russia said it was placing temporary curbs on foreigners seeking to exit Russian assets, braking an accelerating investor exodus driven by crippling Western sanctions.
Russian assets went into freefall with London-listed iShares MSCI Russia ETF plunging 33% to a fresh record low and shares of Sberbank, Russia’s biggest lender, falling to 21 cents on the dollar from just under $9 before the invasion.
The U.S. dollar gained 8.9% against the ruble and U.S. gold futures settled up 2.3% at $1,943.80 an ounce.
Oil prices surged more than 10% at one point as talks about a coordinated global release of crude inventories failed to calm fears about supply disruptions due to the war.
News of the release - less than one day of worldwide oil consumption - underscored the market’s fear that supply will be inadequate to cover growing disruptions to the crude market.
Both oil and gas prices are now up nearly 60% since fears of an invasion of Ukraine began to escalate in November.
Heavily weighted financials, which would likely benefit from higher rates, fell 1.9% in Toronto even as Bank of Nova Scotia and Bank of Montreal joined their Canadian rivals in beating analysts’ expectations for first-quarter profit.
The energy sector rose 1.2% as the price of oil settled 8% higher at $103.41 a barrel on the potential for severe disruption to Russia’s oil exports. The TSX materials group, which includes precious and base metals miners and fertilizer companies, added 2.5%.
Reuters, with reports from Darcy Keith of The Globe and Mail
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