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Multi-Manager Perspectives: Markets bracing for escalation in Ukraine

Anthony Willis
Anthony Willis
Investment Manager

Financial markets continue to digest the consequences of the election of Donald Trump, while in in the world of geopolitics, expectations of a changing world order under Trump 2.0 are having immediate consequences in Ukraine

Markets have put in a mixed performance, with ‘safe havens’ including government bonds, gold and the Japanese Yen finding support as geopolitical concerns escalate.

As the war in Ukraine passes its thousandth day this week, we have seen a notable escalation as President Biden finally authorised the use of US long range missiles to strike deep within Russian territory. The move from the outgoing US President comes as both sides in the conflict intensify their operations with the aim to be in the strongest position possible as the presidential transition in the US takes place. Russia now has the support of North Korean troops on the ground, and last weekend saw the largest missile/drone attack on Ukraine in several months, causing significant further damage to energy infrastructure and resulting in widespread blackouts. Russia is looking to re-take 600 square kilometres of territory in the Kursk region that was invaded by Ukrainian forces in the summer. Russia still occupies about 20% of Ukraine. Russia responded angrily to the US move to supply additional resources, including land mines, saying President Biden was trying “to keep pouring fuel on the fire and provoke an escalation of tensions”. Spokesman Dmitry Peskov reiterated previous comments from President Putin, who equated such a move to “war between Moscow and the west”. Peskov added “if this decision has been taken, it means nothing other than the direct involvement of NATO countries, the US and European countries, in the war in Ukraine”.

President Putin amended the Russian nuclear doctrine to allow a nuclear response in reprisal to a significant conventional weapons attack on the country. President Zelensky told Ukrainian media he wants to end the war next year. Ukraine’s President is aware of the waning support from the west and huge uncertainty over how incoming President Trump will seek to resolve the situation. In the short term, the conflict will likely get worse before it gets better but there is a building view that 2025 will see pragmatism driven by a reduction in western financial and political support push an end to the hot war phase of this conflict, for now at least, with Russia holding on to Crimea and parts of the four provinces of which it has about 80% of the territory and some sort of demilitarised zone along the new border. President Putin is very much able to ‘play the long game’ in which western support, led by the US, is clearly on the wane. Ukraine is unlikely to regain all lost territory, nor will it likely be able to join either the EU or take full membership of NATO in the foreseeable future but western security guarantees of some sort seem likely.

The fractured state of global politics was on display at the G20 summit in Rio de Janeiro this week. Neither Presidents Putin or Zelensky attended (the former is under an international arrest warrant which somewhat limits his travel choices). Clear divisions between ‘the west’ and the ‘global south’ of emerging countries including China, India and Brazil were on display over a number of issues, not least the wars in Ukraine and Middle East along with the spectre of escalating trade tensions and policy uncertainty under the incoming Trump administration.

In the US, equity markets continue to ponder life under Trump 2.0 with investors attempting to second guess policy guided by the ever-growing list of Trump nominees for government roles. Financial stocks have responded well to the election result on expectations of looser regulation though we still await news of a nomination for Treasury Secretary. Healthcare stocks have struggled against concerns over the nomination of ‘vaccine sceptic’ Robert F Kennedy as Health Secretary. The big winner appears to be Tesla, whose share price has rocketed by almost 40% since the election on the back of CEO Elon Musk’s close connection with Trump and nomination as co-head of a new Department of Government Efficiency. Tesla shares have also been boosted by speculation that regulations around self-driving vehicles will be loosened under the new government.

It has been a quiet week for economic data though the UK inflation numbers on Wednesday showed a notable increase, as the tailwind from lower energy prices turned to a headwind, as the 10% increase in the energy price cap was reflected in the October figures. UK CPI was 2.3% year on year in October, up from 1.7% in September and higher than expected. Core CPI was ahead of expectations at 3.3% year on year, as was services CPI at 5.0%. Earlier in the week, Bank of England Governor Andrew Bailey noted challenges around sticky inflation, but the data did not shift expectations that the Bank will gradually ease policy over the next 18 months. Speaking to the Treasury select committee on Tuesday, Bailey noted there are “different ways” the increase in employer national insurance payments may play out. The £26bn of increased national insurance contributions could be passed on via higher prices, be absorbed through lower profit margins or impact staff pay and hiring, or most likely, elements of all three. Bailey said, “a gradual approach to removing monetary policy restraint will help us to observe how this plays out, along with other risks to the inflation outlook”. The Bank expects the Budget to bring higher growth but also higher inflation, with CPI expected to be 2.7% in the final quarter of 2025, having eased from around 3% over the summer months of the year. Given the freezing weather this week, summer 2025 feels like a long way off right now!

Source: Bloomberg as at 22 November 2024

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It is no exaggeration to say that financial markets and governments across the world have greeted the clean sweep by Republicans in the US elections with some nervousness.
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This week has been a reminder of the rollercoaster in news flow that financial markets are set to experience under four more years of Donald Trump.
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Multi-Manager Perspectives: Markets bracing for escalation in Ukraine

Important information

Please note that this is a marketing communication and does not constitute investment advice or a recommendation to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. Views are held at the time of preparation.

Past performance is not a guide to future performance. Stock market and currency movements mean the value of investments and the income from them can go down as well as up and you may not get back the original amount invested.

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