Ukraine Tensions Sink Stocks, Propel Oil And Gold higher

• Warnings of imminent Ukraine invasion send markets into a tailspin
• Stocks tank, dollar and yen advance, oil breaks higher, gold shines
• Meanwhile, speculation about emergency Fed action is running wild

Geopolitical tensions have returned to haunt financial markets. The US president called on all American citizens to leave Ukraine immediately on Friday, citing the threat of a Russian invasion that could begin at any moment. It is still unclear how much of this is political grandstanding as the White House may be trying to put Russia under the global spotlight to deter military action.

Nonetheless, market participants took the warning seriously, which sparked a classic flight to safety. Stock markets tanked as investors slashed their exposure to riskier assets and sought shelter in safe havens, driving gold prices to three-month highs.

Bullion has displayed remarkable resilience to fading central bank liquidity and soaring bond yields this year, essentially defying gravity thanks to demand for geopolitical hedges. The heated rhetoric has also been a blessing for oil prices, which rose to fresh seven-year highs amid fears of an energy crisis in case Western sanctions cripple exports from Russia.

Euro suffers, dollar and yen shine

In the FX arena, the euro came under heavy fire as traders priced in the collateral damage from a potential conflict at the Eurozone’s doorstep and the spillover effects from spiraling energy prices. This is already a huge problem in Europe as consumers are being squeezed by rising electricity bills.

Of course, the Russian ruble got eviscerated too despite the spike in oil prices. On the opposite side of the risk spectrum, the US dollar and the Japanese yen shined bright as traders looked for protection from the storm.

Beyond defensive flows, speculation around what the Fed will do next has also put the wind back in the dollar’s sails, after another scorching hot US inflation print sent bond markets scrambling to price in aggressive rate increases.

Six and a half rate hikes are now priced in for the year, the probability of a 50 basis points move in March has gone through the roof, and there is all kinds of speculation about an emergency Fed meeting being called this week.

What’s next

Global markets are at the mercy of politics for now and whether the Ukraine crisis evolves into a kinetic war is what matters most. The German Chancellor will head to Kiev today in an attempt to defuse the situation, so the diplomatic effort continues.

On the bright side, there’s so much geopolitical risk premium priced into most assets right now that if the situation de-escalates peacefully, the ensuing relief rally could be powerful. The next few sessions might be gloomy as the fog of war descends on financial markets, but the trading playbook generally says that war concerns tend to fade.

Indeed, equity markets have had everything thrown at them lately - from rising Fed bets to war threats - and have escaped with only minor injuries. The volatility will likely continue as investors learn to live without endless liquidity, but with the economy still in good shape and buybacks going strong, the market is unlikely to crash either. The turbulence might even be a gift to investors with long time horizons.

As for today, we will hear from ECB President Lagarde at 16:15 GMT.