European stocks rise as Shenzhen lockdown raises global supply fears

[ad_1]

Residents queue to undergo nucleic acid tests for Covid-19 in Shenzhen, China on 14 March 2022. European stocks rose on Monday as oil prices fell and China battles its biggest COVID outbreak since the onset of the pandemic. Photo: STR/AFP via Getty

European stocks started the week in the green as oil prices retreated and China battles its biggest COVID outbreak since the onset of the pandemic, raising fears of a disruption to global supplies.

The FTSE 100 (^FTSE) gained 0.5% as index provider FTSE Russel announced that a slew of Russian companies would be deleted from its lists.

Russia-focused mining firms Evraz (EVR.L), Polymetal International (POLY.L), Petropavlovsk (POG.L) and small-cap investment company Raven property (RAV.L) will be deleted from all FTSE indexes this month.

Evraz shares were suspended last week after its largest shareholder Roman Abramovich was sanctioned.

Miners fell on London’s bluechip index as China’s COVID cases threaten commodity demands. Anglo American (AAL.L), Rio Tinto (RIO.L) and Glencore (GLEN.L) fell 4.6%, 4.1% and 4.4%, respectively.

It comes as the Bank of England is expected to raise interest rates by 25 bonus points to 0.75% — the pre-pandemic level — for the second meeting in succession, and the third rate rise in a row. The BoE’s projected terminal rate is 1.75%.

Elsewhere in Europe, France’s CAC (^FCHI) was 2.1% higher and the DAX (^GDAXI) rose 2.7% in Germany.

Read more: Evraz shares halted as Abramovich sanctions spark sell-off

Global markets have been rocked by dramatic reversals as Russia’s invasion of Ukraine continues to affect the prices of oil, wheat and other commodities produced in the region.

In commodity markets, oil prices retreated at a sharp rate after rising to a 14-year high. Brent crude (BZ=F) was down 6.9% to $104.88 (£80.36) a barrel in afternoon trade on Monday in London. US light crude (CL=F) fell 4.5% to $104.04 in electronic trading on the New York Mercantile Exchange.

Brent crude fell 6.9% to $104.88 a barrel after soaring to a 14-year high last week. Chart: Yahoo Finance UK

Wheat prices also saw the biggest weekly decline in over a decade, despite also posting a new record high.

Gold, an asset that investors perceive as a safe haven, fell on Monday amid hopes of progress in Ukraine talks. Spot gold (GC=F) was down 1.2%.

Story continues

Economist have warned that a move away from Russian agricultural and energy products could tip the eurozone economy into recession as around 40% of the bloc’s energy supply coming from Russia.

Jennifer McKeown, head of the global economics service at Capital Economics, said that limits on agricultural products like wheat, corn, palladium and gas could put “pressure” on several sectors.

“Existing plans to cut back on energy imports from Russia are going to have a significant impact on the eurozone economy,” said McKeown.

If the cut back needs to be escalated due to tighter sanctions it’s possible that could tip the bloc into recession, which could lead to “power outages” in Europe, she added.

Read more: UK set to ban Russian oil imports

Across the pond, US benchmarks opened in the green on Monday ahead of an anticipated 25bps Federal Reserve (Fed) interest rate hike later this week.

The Fed is expected to raise rates at its meeting this week for the first time since December 2018 as central banks act to stamp out the highest inflation in generations, while trying to avoid triggering a recession by hiking rates too high or too quickly.

Wall Street’s S&P 500 (^GSPC) added 24.18 points, or 0.6%, to 4228.49. The tech-heavy Nasdaq (^IXIC) rose 0.2%, while the Dow Jones (^DJI), which posted its fifth consecutive weekly decline last week, gained 0.9%. The Russel 2000 index (^RUT) of small firms was flat.

Read more: Ukraine war puts new urgency around better UK-EU trade relations

Away from events on the ground as Russia advanced its attacks on Ukraine over the weekend, analysts say market attention is also turning to the probability of a Russian default as its economy is hit by sanctions.

“Russia is due to make payments on some of its debt later this week with ratings agency Fitch expecting to see an “imminent” default, which could trigger a chain of other defaults,” said Michael Hewson, chief market analyst at CMC Market.

Meanwhile, the Moscow Exchange (IMOEX.ME), Russia’s main stock market, will remain shut down until 18 March. Stocks last traded on 25 February, a day after the Ukraine invasion. This marks the longest market closure in the country’s history as officials attempt to stave off financial collapse when trading resumes.

China’s foreign ministry spokesperson Zhao Lijian said that reports over the weekend that Russia had asked for military assistance were “disinformation”.

Asian stocks were overnight mixed as China battles its biggest COVID wave since March 2020. The country put 17.5 million residents of southern metropolis Shenzhen in lockdown for a week as the country reported over 1,800 cases on Sunday.

The city is a major producer of electronic and automative components, with prolonged lockdown potentially creating a fresh wave of disruption to global supply. Officials have also shut schools for students from kindergarten through middle schools in Shanghai.

The Nikkei (^N225) rose 0.6% in Japan, while the Hang Seng (^HSI) crashed 4.1% in Hong Kong, its biggest fall since 2008, and the Shanghai Composite (000001.SS) declined 1.9%. The MSCI’s broadest index of Asia-Pacific (AAXJ) shares excluding Japan edged 2.3% lower.

“Shenzhen going into lockdown could have negative effects beyond China’s economy. It is known as ‘the world’s factory’ thanks to its concentration of electronics manufacturing,” said Russ Mold, investment director at AJ Bell. “Any prolonged disruption to operations could cause yet another global supply chain crunch.”

Watch: How does inflation affect interest rates?

[ad_2]