Ukraine crisis: markets one step closer to "peak uncertainty"

We’re all shocked and saddened by events in Ukraine. Although we are talking here about the impact on markets, we acknowledge first and foremost that this is a human crisis with potentially awful consequences for millions of people.

However, at times like this, clients expect us to stay level headed.

Previous crises have shown that what markets hate most is uncertainty. The worst phase for the market is when uncertainty is at its peak.

Now Russia has invaded Ukraine, markets have moved a step closer to peak uncertainty and into the realm of actual bad news. This is easier for investors to price, even if the consequences are negative.

The one major source of uncertainty is how the Ukrainians and the Western powers will react. The assumption is that the response will be ever tougher sanctions. But there is also the question of whether at some point the West will be willing to intervene militarily.

We haven't reached "peak uncertainty" just yet.

In terms of regions, some people are treating this as an emerging markets issue, but it is broader than that. Europe in particular is arguably the most exposed to the impact of what is going on.

Looking beyond the impact of geopolitical risk on risk premiums, the main economic transmission mechanism is via energy prices. This poses particular challenges for Europe given its reliance on Russian energy.

This has detrimental implications for growth and complicates the picture for the European Central Bank.

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