Why Do Stock Markets Fall in Times of War?

As soon as Russia invaded Ukraine and started the war, we saw a large dip in the stock markets around the world. Despite the fact that the trade between India and Ukraine is not even 0.5%, the Sensex crashed over 700 points in India.

Let’s see the market crashes that have occurred previously due to conflicts in the past.

In 2001, when the 9/11 attack took place, the market fell by 16%. In 1990-1991, when the war between Iraq and Kuwait broke out, the market dropped by 13%. The market fell by 12% following the Korean War in 1950–53. Because of the current war between Russia and Ukraine, the market has dropped by over 12%.

This market fall is not related to trading. India’s trade with Ukraine is only 0.5%, and we do not have much economic dependency on Russia, unlike many European countries. Because of the high transportation costs, India does not buy much crude oil from Russia. Many European countries are dependent on Russia for their oil and natural gas.

Due to this war, gold and crude oil prices are rising fast, and the danger of inflation is looming all over the world. Currently, the inflation rate in the US is 7.5%, which is the highest in the last 40 years. After 1982, this is the first time inflation has grown so much. It is expected to increase more due to this war.

But what does this war have to do with the rise in the prices of crude oil and gold?

Russia ranks 2nd in crude oil production in the world and 3rd in the production of natural gas. Russia ranks third in terms of gold production, trailing only China and Australia.Russia has a huge role in supplying all three of these very important items to the world. Due to the war, most of the ports in Ukraine are closed for trading. It does not affect the world market so much because Ukraine has a bigger role in the grain market than in the crude oil, natural gas, and gold markets, where they don’t play a very important role. As of now, traders are a little afraid of trading from Russian ports because a lot of these transport companies buy insurance. But in these times of war, the companies are asking for more insurance as there is danger in transportation. Therefore, the total cost is increasing. Hence, this uncertainty and nervousness have led to a lack of supply. When there is a lack of supply and demand, the price definitely increases.

Of all the EU countries' 25% of crude oil requirements, 33% to 40% of their natural gas is fulfilled by Russia alone. So if they aggressively support Ukraine, they will have a major problem.That is why they are staying away from the war and just imposing sanctions.

The danger for the world is that as soon as oil prices shoot up, almost all goods become costlier because transportation becomes costly. Also, for many industries, like the paint industry, more than 50% of their raw materials, like monomers and titanium dioxide, are crude derivatives. As a result, their profit margins suffer.Their prices are falling a lot.Not just paint companies, the prices of tyre companies are also falling because more than 30% of their raw material comes from crude derivatives. The prices of aviation companies have also dropped by 10% because their overhead costs come from aviation turbine fuel.

People are fearing that if more countries join the war, things will escalate further and more risk factors will get involved in the matter. Crude oil prices in the last four months have increased by more than 30% and have reached $100 per barrel. If this war continues for a long time, everyone is afraid that inflation will rise a lot. If this happens, it will be a disaster for almost every country. Therefore, investors have become very pessimistic in the short term and are continuously selling their shares. Hence, we could see a fall in the market.