Global Tensions in Financial Markets: What is causing it?

24 January 2022

Global markets are in jitters with the Federal Reserve indicating a rate hike in the future and inflation pressures. Adding to this, tensions are mounting with Western Countries expecting a war on Ukraine by Russia.

Amidst these weak global cues, the Indian market is cautious as well. In the past one week the NIFTY 50 index is down nearly 6% and in the past month the indices have remained subdued. NIFTY 50 merely increased by 2% in the past month. While the industry experts, as per media reports, are expecting the situation to scale down immediately, however, there is likely a near-term impact.

Read to know more about the stock market impact.

What could impact the stock market?

Technology and globalisation has brought the world together and it stands true for stock markets as well. Any news in the US, Europe and even in North America could have an impact in the Indian financial markets. Some of the recent examples include Evergrande crisis, Evergiven ship stuck in Suez Canal and even the gloal chip shortage.

In this regard, the weak global cues include a few pointers that could impact the Indian market.

Global inflation concerns

When the global economies started to remove restrictions and unlock the pandemic related controls, the inflation related concerns started to get flagged by many experts. Now, the economy too started to feel its pinch. According to multiple media reports, as per Japan’s inflation data, the core consumer prices rose by 0.5% in December compared to the same period last year. The key areas that witnessed increase in inflation were fuel and raw material costs.

Similarly, the US too is facing a rise in inflation. Wall Street continues to be cautious with the anticipated rising interest rate environment. For instance, as per a few media reports, two-year US Treasury yields have seen the biggest monthly jump in January this year since 2016. In Germany, 10-year yields rose above 0% for the first time since 2019.

So what does it mean for the Indian market?

When inflation increases, you and the companies will have to pay more to buy the same thing. This means, increasing costs for individuals and denting the margins for the companies. Increasing inflation leads to higher interest rates. This pushes the cost of borrowing for the companies.

Rise in interest not only affects equity but also the bond market. With increase in interest rates, the bond yields also move up, resulting in a fall in bond prices. This is bad for investments made by banks, mutual funds and companies alike.

Inflation also impacts commodity prices. Considering that companies and financial institutions are recovering from the effect of the pandemic lockdowns, the margins and profitability could be impacted going ahead.

Read more about Fed Rate and impact on Indian markets: Click here

Russia – Ukraine border tensions

Russia and Ukraine have unresolved border issues. While this geography story is for another time, Western powers are nervous over Russia invading Ukraine. The EU and the US are committed to restoring the sovereignty in Ukraine. And over the years, the Western Allies have imposed sanctions on Russia for its actions. In 2014, the US imposed sanctions on Russia, though the global markets didn’t see much of an impact.

This time too the allies have threatened Russia with sanctions. However, the impact may be severe, though it is not clear exactly what sanctions are likely to be imposed. 

While the global economy growth is strong, markets around the world feel inflationary pressure. Now with sanctions, it could be a recipe for a stock market disaster. Here is why

  • This is because, one, Russia is a commodity powerhouse. That is, it is the key or main supplier of natural gas, metals and agri products to many countries. Any sanctions to restrict Russia could significantly affect the commodities market. For instance, Russia is among the world’s largest exporter of energy products – oil & gas. Nearly 50% of gas requirements for Europe comes from Russia. Same is the case with crude oil. According to a media report, crude oil prices are hovering at a 7-year high with analysts estimating that Brent Crude could be up to $100 per barrel.
  • In addition to oil & gas, Russia is the major producer and exporter of metals after China. Particularly metals including aluminum, copper, nickel, platinum and palladium. According to a media report, nearly 45% of global palladium comes from Russia. Already, most of the metals prices are up to an all-time high. For instance, Aluminium prices are up nearly 50%. Same is the case with other metals.
  • Similarly, Russia is the largest exporter of wheat, which makes up for nearly 20% of global trade, and corn.

Any sanctions against Russia from the US could negatively impact global trade. With most economies recovering (some are yet to recover) from the impact of Covid, any unwarranted increase in prices could hamper the growth.

India impact

The impact on India due to the two main factors mentioned above is evident. Any impact on the oil prices is bad for the economy. While India is mainly dependent on energy requirements with Russia, any increase in price or sanctions against Russia could put India in a difficult position. For now, many experts expect these to get priced in and are in wait and watch mode.

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