Market Report: European indices fall amid fears of escalation of Ukraine conflict

by | Sep 21, 2022

Written by Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown

Fears have ratcheted up that there will be a sharp escalation of the war in Ukraine, after the mobilisation of 300 thousand reservists, sending investors scuttling into safe haven assets. The alarming rhetoric of President Putin has rattled markets, sparking a fresh flight to the dollar, with the euro and sterling losing more ground.

The euro dipped fell sharply to $0.98 with the pound plummeting to a fresh 37 year low against the greenback at $1.133. Sterling has not been helped by a fresh snapshot of public sector finances which showed that the cost of serving UK government debt last month hit a record high in August, before Liz Truss came to power with her slash and spend policies.

Despite indications that the European central bank will step harder on the pedal of rate rises, which would see investors moving away from bonds, the yield on the two year German bond yield has fallen back, indicating investors are scampering back into fixed income

The FTSE 100 opened lower, before clawing back into positive territory helped by defence stocks such as BAE Systems which jumped in early trade, up by more than 4%. There are growing expectations that there will be heightened demand for military hardware to counter Russia’s aggression, with NATO member countries having already pledged significant increases in spending on defence.

Energy stocks are also among the biggest gainers on the FTSE 100, with the oil price edging higher amid fresh supply concerns. Nerves are again on edge about energy security particularly for European nations, amid concerns about the liquidity situation of suppliers.

The move by the German government to nationalise Uniper by buying Fortum’s slice of the gas importer, highlights the worries of politicians about the precariousness of the market.  This will go some way to assuaging worries that steep rationing could be ahead for Germany’s industries, with a knock-on effect for the wider economy.  Indices are also highly sensitive to the big rate hike expected today from the US Federal Reserve, and this latest escalation of tensions with Russia heaps more nervousness on already highly strung financial markets.

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