European Stocks Enter Correction on Russia’s Attack of Ukraine
The Stoxx Europe 600 slumped 3.2% as of 8:07 a.m. in London. US futures signaled Nasdaq 100 is poised to fall into a bear market.
(Bloomberg) -- European stocks entered a technical correction Thursday as investors exited risk assets globally after Russian forces attacked targets across Ukraine.
The Stoxx Europe 600 fell 3.3% by the close at its lowest since May 2021, bringing total declines since a January record high to 11%. Banks were the worst performers, while energy stocks outperformed as Brent crude surged above $105 a barrel for the first time since 2014.
President Vladimir Putin’s decision to order a military operation to “demilitarize” Ukraine sparked a rout in risk assets and sent investors flocking to havens. The invasion triggered the worst security crisis in Europe since World War II and the European Union, U.S. and U.K. promised more sanctions they said would hit Russia’s economy and financial sector hard.
“The situation is evolving toward the most severe scenario we had in mind,” Monica Defend, global head of research at Amundi, said in a Bloomberg TV interview. “The real loser in economic terms will be Europe. Just because inflation is going to drive on the back of higher energy prices and the risk of second-round effects to growth.”
Similarly, Paul O’Connor, head of multi-asset at Janus Henderson Investors, thinks the euro zone’s stocks and economy will be affected.
“Given that the unfolding events seem likely to cast a shadow over the continent for months to come, we are exploring opportunities to rotate exposures from continental European stocks into the FTSE 100 and emerging markets,” O’Connor said.
This is a major shift of tone from earlier this year when major strategists and investors had predicted that European equities would outperform in 2022 thanks to their cheapness and cyclical exposure.
“During these weeks of uncertainty I could imagine Europe underperforming the U.S., as many people have bet on a European outperformance this year and a weaker U.S. dollar,” said Martin Moeller, co-head of Swiss and global portfolio management at Union Bancaire Privee. “Such trades could unwind now, at least partially.”
The MOEX Russia Index collapsed as much as 45% Thursday in the third-worst plunge in market history in local currency terms. It later erased some declines to close 33% lower, but still erasing more than $200 billion in shareholder wealth.
“Expect more turmoil over the next few hours and days as markets attempt to assess the wider economic impact,” said Lale Akoner, senior market strategist at BNY Mellon Investment Management. “If the situation escalates further, we expect to see an increase in demand for physical cash, real assets, and precious metals and lower demand for financial assets, including cryptocurrencies.”
Akoner expects positive developments for energy and basic materials industries and pressure on the consumer discretionary sector.
The crisis in Ukraine has become the latest concern for investors in European stocks. Beyond that, traders have been worried about increasingly hawkish central banks and the effect soaring inflation will have on growth.
“Stock markets were already hit and are now pricing in further military escalation in Ukraine. The selloff will therefore continue,” Norbert Frey, head of portfolio management at Fuerst Fugger Privatbank, said by email. “We expect volatility to rise in the coming days and weeks, which will require investors to have good nerves. We will see a flight into supposedly safe government bonds, gold and, above all, cash -- at least temporarily.”
Alberto Tocchio, a portfolio manager at Kairos Partners, said the market may have to consider an economic slowdown with a stagflation scare. “Nobody has prepared the portfolios for this outcome,” he said.
Europe in particular is now dealing with a growth shock as central banks tighten further at a time when commodity prices soar, Christian Mueller-Glissmann, strategist at Goldman Sachs Group Inc., said in an interview with Bloomberg TV. Still, geopolitical risk “often creates opportunities to kind of step in because markets often overprice” it, he said.
Others are also suggesting this could be the right time to buy into the weakness.
“This sharp drop in equities proves likely as a buying opportunity given the still solid macro backdrop and the already very bearish sentiment and light investor positioning,” said Ulrich Urbahn, head of multi-asset strategy and research at Berenberg.
The European Renewable Energy Index surged as much as 9.3% on Thursday, the biggest jump since the pandemic lows of March 2020. Orsted A/S, Siemens Gamesa Renewable Energy SA and Vestas Wind Systems A/S were the biggest winners in Europe, up more than 10% each.
Among individual movers, BP Plc slumped on the company’s exposure to Russia’s Rosneft Oil Co. Meanwhile, Raiffeisen Bank International AG dropped the most since October 2008, with Deutsche Bank AG strategists saying it’s the most exposed European lender to Russia and Ukraine risks.
BAE Systems Plc, Rheinmetall AG and Hensoldt AG were among defense stocks advancing Thursday.
MARKETS
- Equities: Euro Stoxx 50 down 3.6%, FTSE 100 down 3.8%, DAX down 4.0%, CAC 40 down 3.8%, FTSEMIB down 4.1%, IBEX 35 down 2.9%, AEX-Index down 2.7%, Swiss Market Index down 2.4%
- Bonds: German 10-year-yield down 5bps at 0.17%, Italian 10-year-yield down 13bps at 1.81%, Spanish 10-year-yield down 8bps at 1.17%
- Credit: iTraxx Main up 2.9bps at 74.5, iTraxx Crossover up 15.3bps at 367.1
- FX: Euro spot down 1.43% at 1.1145, Dollar index up 1.24% at 97.38
- Commodities: Brent crude up 7.2% at $103.9/bbl, copper down 0.1% at $9,858/MT, iron ore down 0.3% at $141.75/MT, gold up 0.6% at $1,920.9/oz
EUROPE EQUITIES
- 0 out of 20 Stoxx 600 sectors rise; real estate sector has the biggest volume at 157% of its 30-day average; 79 Stoxx 600 members gain, 518 decline
- Top Stoxx 600 outperformers include: Orsted +15.8%, Vestas Wind Systems +11.5%, EDP Renovaveis +10.5%, Siemens Gamesa Renewable Energy +10.5%, Siemens Energy +7.4%
- Top Stoxx 600 underperformers include: Polymetal International -37.8%, LPP -25.2%, Raiffeisen Bank International -23.1%, Powszechna Kasa Oszczednosci Bank Polski -16.8%, Nokian Renkaat -14.8%
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