European shares remained under pressure on Wednesday as Brent crude and natural gas prices surged in response to Russia intensifying its attacks on Ukraine’s biggest cities.
The regional Stoxx Europe 600 share gauge edged 0.2 per cent lower following a sharp drop in the previous session. Hong Kong’s Hang Seng index dropped 1.8 per cent and futures contracts tracking Wall Street’s S&P 500 index traded steadily.
Brent crude, the international benchmark, rose 6.7 per cent to $112 a barrel after US president Joe Biden declared Russia to be isolated from the world and hinted at more economic sanctions ahead.
Meanwhile, European natural gas prices hit an all-time high, with futures linked to TTF, Europe’s wholesale natural gas price, rising more than 50 per cent to €185 per megawatt hour.
Sanctions imposed on Russia by western countries have so far sought to avoid the energy sector but have nonetheless stoked volatility in global markets on concerns over disruptions to supply.
Investors are struggling to assess whether support from central banks will prop up stock markets pressured by the potential inflationary and recessionary effects of a drawn-out conflict in a key commodity-producing region.
“Brent crude is the biggest fear factor for equity markets,” said Maarten Geerdink, head of European equities at Dutch investment house NN Partners. “If it goes ballistic and moves towards $150 or more a barrel, then [economic] growth really gets hammered.”
But Ross Mayfield, investment strategist at Baird, said “there’s a risk-off sentiment from the war but that also may put the Federal Reserve and other central banks on a less aggressive tightening path”.
The yield on Germany’s benchmark 10-year Bund rose 0.03 percentage points to minus 0.04 per cent. This followed a powerful rally for US, UK and eurozone government bonds on Tuesday as derivatives markets began pricing in a much slower pace of monetary tightening by central banks, which had been expected to exit pandemic-era monetary support with a series of interest rate rises.
The 10-year US Treasury yield rose 0.02 percentage points to 1.73 per cent. This debt yield, which underpins borrowing costs worldwide, dropped almost 0.1 percentage point on Tuesday and is now back to levels last seen in January before Fed chair Jay Powell prepared financial markets for a string of aggressive rate increases.
The latest gains for oil, which left Brent almost 15 per cent higher since President Vladimir Putin launched his invasion of Ukraine, came as Russia stepped up the bombardment of its neighbour’s biggest cities. Prices rose despite the US and 30 other countries saying they would release 60mn barrels from their strategic reserves.
Biden has come under mounting pressure to ban Russian oil imports, with Republicans and Democrats calling on the US president to cut off energy ties with the Kremlin. In his State of the Union speech on Tuesday, Biden voiced support for punitive measures against Russia but stressed that getting prices under control was his “highest priority”.
Russia’s central bank said the Moscow stock exchange, which did not open for trading on Monday, would remain closed on Wednesday.
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