War in Ukraine: European stock markets are heading for their worst week since the start of the pandemic

The war in Ukraine continues to plague European markets. On the Paris Stock Exchange, the CAC 40 index plunged 3.2% early Friday afternoon to 6,171 points, as the Russian invasion continues unabated. According to French President Emmanuel Macron, who spoke with Vladimir Putin, “the worst is yet to come” and Russia wants to “take control” of all of Ukraine. “The risks of escalation remain significant and this crisis will not be resolved quickly,” underlines Christian Parisot of Aurel BGC.

The “save-it-can” on Russian assets, at work since the start of the invasion, is starting to rub off on all the markets of the Old Continent. Investors withdrew $6.7 billion from European equity funds over the past week. These are “the most important releases of the last two decades”, observes Emmanuel Cau of Barclays. The impact of capital flight on the European currency is brutal: the euro lost 2.5% against the dollar this week to fall below $1.10 for the first time since May 2020.

The London Stock Exchange limits the damage

The Parisian index sank 8.8% this week, its worst performance since the start of the pandemic in March 2020. The CAC 40 now shows losses of 16% since its historic record set on January 5 after having chained three sessions of losses greater than 2% since the start of the invasion. It has erased in just two months almost all of the gains recorded since the pandemic and is now approaching its pre-crisis level.

Most European stock markets are going through difficulties of the same magnitude. In Frankfurt, the German DAX has plunged almost 9% this week, and 18.5% since its peak (also on January 5). Reflecting the growing tensions on the stock markets of the Old Continent, the volatility index – sometimes nicknamed the fear index – has returned to its highest levels since the stock market panic of March 2020, at more than 45 points in Europe .

“The outlook is catastrophic” for European markets, say AlphaValue analysts. “The worst is yet to come, and not just on the battlefield,” they warn.

Only the London Stock Exchange manages to limit the damage, because the producers of raw materials weigh heavily in its benchmark index. The FTSE 100 still posted losses of nearly 6% this week.

Mining producers celebrate

Mining and aluminum producers such as Norsk Hydro, Anglo American, Glencore and Rio Tinto, driven by soaring commodity prices, are indeed among the few companies listed in Europe to have made progress this year. They are all up more than 20% since early January, when the pan-European STOXX 600 index fell 13% over the same period.

For most European companies, on the other hand, the surge in energy and raw material prices is bad news, which will weigh on their margins. The threat of “stagflation” is on everyone’s mind. Apart from basic resources and energy, all sectors of the STOXX 600 have lost ground since the start of the year. The banking sector, doubly penalized by the prospect of sluggish growth and delays in the tightening of European monetary policy, has suffered particularly with losses of around 20% over the past two weeks.

Investors, however, know the difference between companies directly exposed to Russia, which have fallen sharply in recent weeks, and others. They also remain on the lookout for opportunities, such as in the defense sector, which should benefit from a significant increase in security spending in Europe. The Italian Leonardo jumped 23% this year, the British BAE Systems 28%, the French Thalès 45% and the German Rheinmetall more than 80%.

To note

The Moscow Stock Exchange, closed since February 28 by decision of the Bank of Russia, will remain closed until at least March 8 inclusive. It is the longest interruption to trading in Moscow since the return of the stock market in the early 1990s.

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