European defence stocks have jumped after the German chancellor Olaf Scholz announced a dramatic increase in military spending, following Russia’s invasion of Ukraine.

Military spending will rise to more than 2% of GDP, in a dramatic shift in German policy (it is estimated to have been 1.5% last year). Germany has long resisted pressure from the US to increase its defence spending in light of its role in 20th century history (the two world wars), and amid strong pacifism among its population.

This looks like a package of measures to defend the rouble including new mandatory sales of 80% of FX revenues for Russian companies. This latter measure looks to prevent the kind of FX hoarding seen during the Crimea crisis of 2014, when Russian energy companies were alleged to have held onto FX earnings and contributed to heavy RUB losses during that period. Additionally, the CBR has temporarily suspended the sale of Russian assets by non-residents. This comes as companies like BP and the Norwegian sovereign wealth fund announce plans to divest Russian assets.

With Western nations moving to extreme sanctions very quickly - e.g. measures to sanction the CBR are now starting to draw parallels with Iran - investors will be nervous that Western leaders bite the bullet and consider whether exposure to Russian oil and gas supplies comes into focus, too. What is clear is that commodity prices, (gas, oil, certain precious/industrial metals and softs such as wheat) will continue to rise and this supply shock should be a negative for activity and equities.

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European defence stocks have jumped after the German chancellor Olaf Scholz announced a dramatic increase in military spending, following Russia’s invasion of Ukraine.

Military spending will rise to more than 2% of GDP, in a dramatic shift in German policy (it is estimated to have been 1.5% last year). Germany has long resisted pressure from the US to increase its defence spending in light of its role in 20th century history (the two world wars), and amid strong pacifism among its population.

This looks like a package of measures to defend the rouble including new mandatory sales of 80% of FX revenues for Russian companies. This latter measure looks to prevent the kind of FX hoarding seen during the Crimea crisis of 2014, when Russian energy companies were alleged to have held onto FX earnings and contributed to heavy RUB losses during that period. Additionally, the CBR has temporarily suspended the sale of Russian assets by non-residents. This comes as companies like BP and the Norwegian sovereign wealth fund announce plans to divest Russian assets.

With Western nations moving to extreme sanctions very quickly - e.g. measures to sanction the CBR are now starting to draw parallels with Iran - investors will be nervous that Western leaders bite the bullet and consider whether exposure to Russian oil and gas supplies comes into focus, too. What is clear is that commodity prices, (gas, oil, certain precious/industrial metals and softs such as wheat) will continue to rise and this supply shock should be a negative for activity and equities.

Continue reading...


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