A brazen Ukrainian drone strike on Moscow has rattled the markets and raised the spectre of a wider escalation, according to UK intelligence monitors. The attack, which targeted infrastructure in the Russian capital, marks a significant escalation in the conflict and underscores the growing volatility of geopolitical risk. For the markets, this is yet another reminder that the war in Ukraine remains a powder keg.
The initial market reaction was predictable: a flight to safe havens. Gold ticked up, the dollar strengthened, and gilt yields dipped as investors sought refuge from uncertainty. But the real concern lies in the potential for a Russian retaliation that could disrupt energy supplies or trigger a broader conflict, sending shockwaves through global markets.
The fiscal implications are stark. The UK, already grappling with stubborn inflation and a sluggish economy, cannot afford another energy price spike. The Bank of England, wary of stoking further price pressures, will be watching the situation closely.
Central bank policy is already in a precarious position. The recent uptick in gilt yields reflects growing concerns about fiscal sustainability, with the government's borrowing costs rising. A major escalation could force the Bank's hand, potentially delaying rate cuts or even prompting a hike to shore up the pound.
This is not a drill. The drones buzzing over Moscow are a reminder that the market's greatest risk is often the one we fail to price in.
