Major European stock indexes plummeted at opening on Thursday morning as investors sought to dump riskier assets following Russia's invasion of Ukraine, raising fears that war in Europe will increase inflation further and derail the economic health of the continent.

The pan-European STOXX 600 index fell 2.9% to its lowest value since May 2021 while the DAX in Frankfurt shed 4.4% of its value at the opening bell, perhaps due in part to Germany's reliance on Russia for energy supplies.

The Paris CAC similarly fell 4.2% at opening, but it has since recovered around a third of the value lost, while a surge in the price of oil softened the blow for the the FTSE 100 in London, which dropped by an initial 2.4%.

Brent oil jumped $5.22 or 5.4% to $102.6, reaching a high of $102.48 early this morning. In the US, West Texas Intermediate (WTI) crude futures added $4.85 to the cost of their barrels leaving them at an eight-year high of $96.95 a barrel, an increase of 5.3%.

Meanwhile, the ISEQ 20 in Dublin fell nearly 4% with shares in Ryanair, ferry group ICG and the banks seeing losses.

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In Russia, the MOEX index plummeted 28.8% in early trade and, earlier, shares on the Hang Seng in Hong Kong closed 3.2% while the Nikkei in Tokyo limited losses to 1.8%.

The sell-off comes after Europe awoke to news that Russia had fired missiles at several Ukrainian cities and that Russian troops had crossed into Ukraine from the south following the authorisation of what Russian President Vladimir Putin called a "special military operation".

US President Joe Biden said the US and its allies would impose "severe sanctions" on Russia, less than a day after the EU ordered a raft of sanctions to take effect against several companies, and hundreds of Russian government officials and legislators who backed independence for the separatist Ukrainian regions of Donetsk and Luhansk.

European banks most exposed to Russia including Austria's Raiffeisen Bank, UniCredit and Societe Generale dropped between 5% and 6.6%, while the wider banking index fell 4.2%.

Technology, travel and leisure were among the other top decliners. Futures tracking New York's S&P 500 fell 2%, and the tech-heavy Nasdaq 100 dropped 2.6%.

Markets analysis

Elliot Hentov, head of Macro Policy Research at State Street Global Advisors, said it will take the market at least a few days to assess battlefield developments as well as the scale of Western sanctions on Russia.

“It’s important to remember that the sanctions are not imposed to change Russia’s plan or to shorten the war, but are there to provide leverage for the ceasefire talks,” said Hentov.

“Should this turn into a protracted conflict, the macro-economy will be impacted by a variety of spill over effects, ranging from 1) market volatility and liquidity disruptions; 2) a spike in commodity prices; and 3) an increase in input prices beyond commodities from areas affected by Russian counter-sanctions; 4) uncertainties over scale of potential escalation (e.g. cyberattacks on Western institutions).

“While central banks can quickly take action in case of liquidity squeeze caused by the sanctions, rapid repricing of commodities can be turbulent and there is a risk of worsening supply chain squeeze in several key industries. If this turns into a long and deeply engaged conflict, we may also see agricultural prices surge adding extra inflationary pressure in the globe.”

SSGA colleague Altaf Kassam, EMEA head of Investment Strategy & Research, added: “The weakness in US markets seems the most overdone, with this move being sentiment, rather than economically-driven, where we feel like the markets have moved from ‘wait and see’ to ‘panic’ mode, and the moves there might actually be overdone, inspiring us to add a little risk in a measured way,” said Kassam.

“Despite the effect that the spike in energy prices should have on increasing headline inflation, the market is now pricing in that Central Bank action should turn more dovish, and rowing back on the number and pace of rate hikes. This adds to our view that market moves, especially in the US, are overdone.”

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