The Kremlin has escalated its rhetoric, threatening renewed strikes on Kyiv and explicitly warning foreign nationals to leave Ukraine. For those of us in the City of London, this is not merely a humanitarian concern but a glaring red flag for global capital flows. When geopolitical risk spikes, markets react with brutal efficiency: volatility rises, flight to safety accelerates, and the cost of capital for emerging economies suffers. Government bonds, particularly gilts, may see temporary safe-haven flows, but the long-term implications for fiscal stability in Europe are concerning.
Let me be clear: this is a demand shock for stability. Investors hate uncertainty, and the Kremlin's latest sabre-rattling injects precisely that into an already fragile post-pandemic recovery. The pound sterling, already under pressure from inflation and stagnant growth, could see further headwinds if this conflict escalates. Central banks, already grappling with stubborn inflation, may face a policy dilemma: do they tighten further to fight inflation, or ease to cushion against geopolitical shock? The Bank of England would do well to remember the 1970s, when oil shocks and geopolitical instability fuelled stagflation.
For the average British investor, the advice is straightforward: hedge your bets. Gold, US Treasuries, and the Swiss franc remain traditional havens. But don't expect miracles. Capital flight from riskier assets will be brutal, and the equity markets will take a hit. The FTSE 100, with its heavy weighting in energy and mining, may outperform, but that is small comfort when global growth fears mount.
Ultimately, this threat is a reminder that fiscal responsibility matters. Governments that spend recklessly and take on excessive debt leave themselves vulnerable to shocks. The Kremlin's actions are a test of western resilience, and the markets will be watching closely. The bottom line: brace for volatility, and keep a close eye on gilt yields.
