Today's Markets: Russia-exposed stocks fall, defence stocks rise, ruble sinks

War reaction sees stock volatility, with fresh sanctions hitting Russian-exposed companies

February 28, 2022

BP shares fall as they seek exit from Rosneft
German companies boost on increased defence budget
FTSE 100 1.6 per cent lower to start Monday

At least they’re talking… Ukraine’s delegation is said to have arrived in Belarus for talks with Moscow… the nuclear rhetoric is not helping but for now most see this as sabre-rattling… we said that about the troop build-up. Talks are key to how things play out this week and they are taking place without pre-conditions. Russia’s negotiator said their side is interested in an agreement with Ukraine as soon as possible. This is not a geopolitical commentary, so we leave out too much about the implications from what’s going on vis-a-vis Putin and the future of European security, but I’d say markets are doing a pretty good job of mispricing geopolitical risks; they are notoriously hard to price for. This means volatility remains until there is resolution on the ground. For now European stock markets trade lower but well off the overnight lows indicated by futures markets; not such a sharp selloff as we might have anticipated. The FTSE 100 traded about 1 per cent lower, whilst the DAX was off 2 per cent or so. Oil markets have also pared gains after gapping higher last night.

Markets are digesting a raft of fresh sanctions that landed over the weekend: Swift ban, Russian central bank assets frozen, flight bans and all sorts. We have also seen an incredible turnaround in German post-war military restraint as it announced plans to increase the defence budget by €100bn this year. Hensoldt (HAG), a German aerospace and defence supplier, jumped 87 per cent, whilst Rheinmetall (ETR: RHM) rallied almost 50 per cent. Other defence stocks rose handsomely: BAE Systems (BA) rallied 13 per cent and Leonardo (BIT: LDO) in Italy climbed 15 per cent. Look for Lockheed Martin (NY: LMT) and Raytheon (NY: RTX) later on. Travel bans and air space restrictions left travel socks down; TUI (TUI) –5 per cent, IAG (IAG) –3 per cent in early trade. European banks were broadly lower as investors de-risked from institutions with direct exposure to the Russian economy; Deutsche Bank (ETR: DBK) and Commerzbank (ETR: CBK) both -7 per cent, SocGen (EPA: GLE) and BNP Paribas (EPA: BNP) -8-9 per cent. Sberbank was warning on outflows, ECB says its European branches face collapse. Restriction on Russia + possible retaliation = slower growth for Europe.

Stocks broadly fell, oil popped before scrubbing gains, and the ruble plunged as the fresh wave of sanctions on Russia over the weekend were greeted with some concern by global investors. USDRUB plunged to 118, its lowest ever, and was last printing 107.50, down 27 per cent from Friday’s close as the Russian currency collapsed in the wake of tough measures by the West to all but cut off Moscow from the global financial system.

Russia has taken some steps to counter the measures, banning foreigners from selling local securities ahead of what is likely to be a day of carnage for Russian stock markets. Local exchanges will not open until 3pm local time (midday GMT) at the earliest. Meanwhile the central bank has hiked interest rates to 20 per cent from 9.5 per cent in a bid to defend the currency... desperate measures and utterly futile.

Crude oil futures leapt, with Brent adding around 5 per cent to trade above $102 before paring earlier gains. This was a swift fade and perhaps does not fully reflect the risks. Another factor to consider is that whilst sanctions don’t bar Russian oil and gas exports, many Western banks are taking matters into their own hands and giving Russian energy a swerve. Meanwhile Iran says 98 per cent of a draft nuclear deal is now complete, which could help keep a lid on prices.

Companies

BP announces Rosneft exit after government push

BP (BP) will sell off its lucrative 19.75 per cent stake in Russian state-controlled oil company Rosneft in response to last week's invasion of Ukraine. It has been a major contributor to earnings since 2013, when the arrangement replaced the difficult joint venture TNK-BP.

Both current chief executive Bernard Looney and former BP boss Bob Dudley have resigned from the Rosneft board.

Chair Helge Lund said the violence against Ukraine represented a "fundamental change" in Russian government behaviour: "It has led the BP board to conclude, after a thorough process, that our involvement with Rosneft, a state-owned enterprise, simply cannot continue," he said.

Secretary of State for Business, Energy and Industrial Strategy Kwasi Kwarteng, who called Looney in for a meeting on Friday, welcomed the sale. "Russia’s unprovoked invasion of Ukraine must be a wake up call for British businesses with commercial interests in Putin’s Russia," he said.

The international response to the invasion ramped up over the weekend, with some Russian banks now blocked from using the Swift transfer system and the US limiting the central bank's access to international reserves. The Norwegian wealth fund also said it would sell off Russian assets.

BP's share price was down 7 per cent in morning trading in London. AH

Ferrexpo delays results on uncertainty

Ukrainian iron ore miner Ferrexpo (FXPO) has said exports remain in doubt despite some rail capacity being available for industry. The company’s largest mine is in between Kharkiv and Kyiv, and has remained in operation, however. Last week, it told buyers supply would be suspended after restrictions on rail and port use came in after Russian invaded Ukraine. “It remains unclear as to the ongoing availability of railing capacity and, if available, the quantity of pellets that the Group may be able to deliver to its European customers,” Ferrexpo said on Monday. It did manage to send a “proportion of its production” to Ukraine’s western border, however.

The company also said its 2021 results would be delayed beyond 16 March, to allow management to focus on the crisis. Ferrexpo’s share price is down around 40 per cent on its pre-invasion price, although saw some improvement on Monday. AH

ABF regains pre-pandemic levels of sales and profit

Associated British Foods (ABF) revealed that interim sales and underlying operating profit are expected to be ahead of pre-Covid levels, aided by positive returns at Primark following the reopening of its stores. This should offset some weakness in the food businesses, which have been hit by rising costs. However, the effect of inflation on raw materials in the first half has been broadly mitigated by a reduction in store operating costs and overheads and a favourable US dollar exchange rate.

Elsewhere in London, we are seeing major declines for Russia-exposed stocks: Evraz (EVR), Polymetal (POLY), Petropavlovsk (POG), JPMorgan Russian Securities (JRS) and Ukraine-focused iron ore miner Ferrexpo (FXPO). Smaller caps like PetroNeft (PTR), Enwell Energy (ENW), Eurasia Mining (EUA) and Raven Property Group (RAV) were also sharply lower.

US futures sank at the open last night but have pared losses. NQ futs hit 13,700 but that’s barely below Friday’s low and nowhere close to Thursday’s lows around. 13,000, where sits the 38.2 per cent Fib level for the pandemic trough-to-top rally. After the first half hour of trade in Europe it was back to 14,000.

Neil Wilson is the Chief Market Analyst at markets.com