Stocks set for painful week as conflict escalates; bonds to earn

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The turret of a destroyed tank is seen on the side of the road in Kharkiv, Ukraine February 26, 2022. REUTERS/Vyacheslav Madiyevskyy

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LONDON, Feb 27 (Reuters) – Global markets were set for another tumultuous week after Western nations announced a series of tough sanctions to punish Russia for its invasion of Ukraine and fighting intensified for a fourth day.

US stocks have fallen nearly 8% so far this year, on track for the worst annual start since 2009, and worries about escalating conflict in Ukraine have rattled markets around the world.

Although Wall Street ended higher on Friday with major indexes up between 1.5% and 2.5%, analysts expected markets to come under selling pressure on Monday.

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“Nobody likes uncertainty, investors certainly don’t like uncertainty and we’re looking at quite a protracted conflict,” said Peter Kinsella, global head of FX strategy at UBP.

“It seems to me that we are in the early stages of a new Cold War, that is pretty clear and will weigh on sentiment for a long time.”

Russian military vehicles entered Ukraine’s second-largest city on Sunday and explosions rocked oil and gas facilities on the fourth day of the biggest assault on a European state since World War II. Read more

In response, the United States and its allies decided to block the access of certain Russian banks to the international payment system SWIFT. The measures also include restrictions on the Russian central bank’s international reserves and will be implemented in the coming days. [PnL8N2V117C]

“Friday’s bounce looked like real short pressure, but Monday should bring fresh selling pressure as SWIFT sanctions and the growing likelihood of freezing Russian currency reserves will inflict real financial hardship on the markets,” John Marley said. , CEO of forexxtra, a London-based FX consultancy.

The Russian invasion comes at a time when investors are already worried about lofty stock valuations and hawkish central banks, with global stocks (.MIWO00000PUS) falling to a 10-month low on Thursday and down more than 7% until now this year.

REDUCE THE RISK

The latest developments could also put further pressure on energy and grain prices, with Brent futures rising above $105 a barrel and wheat futures hitting levels last seen at mid-2008 on Thursday before falling back somewhat on Friday. Read more

The latest weekly positioning data indicates that investors are frantically trying to reduce risk in their portfolios.

Hedge funds cut long bets on the pound while short positions on the yen were reduced, according to data from the Commodity Futures Trading Commission. Separate data from Goldman Sachs showed outflows from European-focused equity funds while flows into developed market equities fell into negative territory.

Safe-haven assets will be sought with US Treasuries, German Bunds and the Swiss Franc likely to see heavy buying as traders work through the implications of the latest round of sanctions.

Russia’s main stock index (.IMOEX) closed 20% higher on Friday after Thursday’s record 33% plunge, while the ruble rallied somewhat after falling to a record low Thursday at 90 to the dollar , with analysts expecting more pain on Monday.

“There is an increased risk of Russian debt default, last seen in 1998, following the weekend announcements,” said Ray Attrill, head of FX strategy at National Australia Bank. .

Market volatility gauges (.VIX), (.MOVE), (.DBCVIX), already at elevated levels, are set to soar on Monday as investors buy derivatives contracts to hedge against further losses should increase. Read more

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Reporting by Saikat Chatterjee; Additional reporting by Karin Strohecker in LONDON and Vidya Ranganathan in SINGAPORE; Editing by Frank Jack Daniel

Our standards: The Thomson Reuters Trust Principles.

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