Ukraine-Russia long-range missile warfare spooks European markets

As the Russia-Ukraine conflict has entered a dangerous terrain of long-range missile warfare, the escalation has sent shockwaves across the European markets.

European stocks on Tuesday fell to their lowest levels in three months, with the market reacting to a series of developments that intensified geopolitical concerns.

The Pan-European Stoxx 600 index dropped for the fifth day, reaching levels not seen since August on Wednesday when Ukraine fired UK-supplied Storm Shadow missiles into Russian territory for the first time in the last 1000 days of the war. Kiev alleges that Russia responded by launching the first-ever long-range ballistic missile any country has used in times of war, hitting Ukrainian territory.

Sectors like the auto industry and banks particularly felt the heat, as investor concerns centred around the economic fallout from the escalating war are growing.

Meanwhile, defence stocks such as Saab in Sweden and Rheinmetall in Germany rose by over 3 percent as the demand for military equipment surged. Italian stocks were among the worst performers, with significant losses noted in the country's major indices.

Pressure on Euro

Responding to the uncertainty, investors turned to safe-haven assets, which traditionally perform well in times of market stress. Gold futures and prices are on the rise, while Bitcoin and government bonds saw gains. Bonds, especially US Treasuries and German government bonds, were in demand as safer, more stable investments compared to equities. The yield on German 10-year bonds fell sharply, hitting their lowest point in nearly a month, before rebounding slightly. The widening yield spread between the US and German 10-year government bonds made the dollar more attractive.

On the other hand, the euro faced downward pressure, falling to 1.052 against the dollar, the lowest level since mid-October 2023, as risk-off sentiment weighed on the single currency. If geopolitical tensions persist, especially with the possibility of Donald Trump's return to the White House, the euro could even reach parity with the dollar.

The energy market saw significant changes as well, with oil prices climbing amid concerns that Ukraine might target Russia's oil and gas infrastructure. Both Brent and WTI crude oil prices surged around 2 percent, while natural gas futures spiked 6 percent, reaching a one-year high. The numbers indicate global supply disruptions can exacerbate if the conflict continues to escalate.