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Markets likely to fall  somewhat more before rising again

It’s a known fact points out that markets globally tend to overreact to geopolitical events. After the Iraqi invasion of Kuwait, for example, the global markets fell but later regained its level within the next six months. If we proxy tensions by looking at Ukrainian EMBI spreads or gold then clearly tensions remain high. In this situation, we think that the key transmission mechanism is not via economic contagion or financial contagion but via commodities. We believe central banks would not change policy unless the rise in commodity prices were to cause a sharp downturn in global growth. 3 scenarios:

Central scenario: No major further escalation: In this scenario, we assume President Putin wins important concessions about Ukraine not joining NATO and over Nordstream.I would expect the oil price to fall modestly and Indian markets finding support at current levels.

Risk scenario: Limited incursion (in a similar style to Crimea): We assume in this scenario that there is less disruption to the Russian banking system and trade in oil and gas exports continues. I would not see this leading to meaningful disruption. Indian markets may fall c5% from current levels.

Low probability scenario: Full-scale invasion: There is little apparent public support for a full-scale invasion among Russians, it would make little strategic sense, and full scale sanctions risk significant damage for the Russian economy. The subsequent rise in resources prices risks a c10% fall in markets from current levels.