This week, Russia made significant updates to its nuclear doctrine, a move that soured sentiment and intensified geopolitical tensions.
KEY THEMES FOR THE WEEK:
· The change in the Russian nuclear doctrine adds to global geopolitical jitters
· Escalating Russia-Ukraine tensions, along with mixed signals from central banks, drive market sentiment across asset classes
· UK and South African yields reflect inflationary and monetary policy shifts
· Gold and oil prices surge as geopolitical tensions escalate
RUSSIA’S SHIFT IN STRATEGY CAUSES THE JITTERS
Russia’s nuclear doctrine, which outlines Russia’s approach to the use of nuclear weapons, is a critical document for understanding the Kremlin’s military and strategic priorities. The updated version, unveiled amidst ongoing tensions with the West, introduces several fundamental changes that signal Russia’s more aggressive military stance. This shift has raised concerns about the potential for increased conflict, leading to volatility in global stock markets and commodity prices.
Critical changes in Russia’s nuclear doctrine
Russia’s updated nuclear doctrine emphasises several crucial shifts in its stance on nuclear weapons, particularly in terms of the circumstances under which it might use them.
One of the most notable changes is the reassertion of Russia’s position on nuclear weapons as a deterrent against non-nuclear threats. In previous iterations of the doctrine, Russia maintained that it would only use nuclear weapons in response to nuclear or large-scale conventional attacks that threatened the survival of the Russian state. However, the new doctrine expands this definition, suggesting that Russia could consider using nuclear weapons in the event of “strategic destabilisation” or even “unacceptable harm” to its sovereignty. This potentially opens the door to nuclear retaliation in scenarios that might have previously been seen as non-nuclear, raising the stakes for the West.
Another significant change is the reinforcement of Russia’s policy on “escalating to de-escalate”- a concept that suggests Russia may use nuclear weapons in limited strikes to force a resolution of a conflict on favourable terms. This doctrine was notably used during the annexation of Crimea in 2014 and, more recently, during the war in Ukraine, as Russia has increasingly relied on nuclear rhetoric to deter Western intervention.
The update also highlights Russia’s increasing reliance on tactical nuclear weapons, which are designed for use on the battlefield, as opposed to strategic nuclear weapons intended for deterrence or massive retaliation. This shift could indicate Russia’s willingness to use nuclear force more readily in the context of regional conflicts rather than limiting nuclear use to existential threats.
Implications for the West
The implications of these changes are profound, especially for Western nations and their security strategies. With the expansion of conditions under which Russia might use nuclear weapons, the North Atlantic Treaty Organisation and the European Union face the challenge of adapting their defence postures to counter this new reality.
The rhetoric of “escalating to de-escalate” places additional pressure on Western powers to calibrate their own deterrence strategies carefully, as any direct confrontation with Russia could now escalate more quickly to include nuclear exchanges.
The update also challenges the long-standing framework of arms control and nuclear disarmament that has been a cornerstone of post-Cold War relations between Russia and the West. With a more flexible approach to nuclear use, the updated doctrine undermines the notion of Mutually Assured Destruction, making it more difficult for Western leaders to predict or control escalation. The uncertainty surrounding Russia’s nuclear intentions will likely increase caution in Western capitals, particularly in Washington, London, and Brussels, where decision-makers must now plan for a broader range of potential conflict scenarios.
Market reactions: heightened risk and volatility
The news of Russia’s nuclear doctrine update has contributed to the souring market sentiment, adding to the prevailing uncertainty surrounding global geopolitics. Global markets are susceptible to developments in Russia and its interactions with the West. The prospect of heightened nuclear risk has triggered a flight to safety. Stock markets across Europe and North America saw a sharp decline in response to the update, with investors wary of the potential for increased military escalation. The threat of nuclear conflict, while still remote, significantly impacts risk appetite, with investors seeking to hedge against the potential for greater geopolitical instability. Sectors such as defence, energy, and commodities have been the most impacted, as the risk of conflict disrupts supply chains and raises concerns about resource shortages.
Commodity markets, particularly those related to energy, have also been rattled. Oil and natural gas prices have spiked as fears of supply disruptions in the event of broader conflict loom large. Meanwhile, the price of gold, traditionally viewed as a safe haven in times of uncertainty, has risen sharply as investors flocked to the precious metal to mitigate perceived risk. Currencies have also seen fluctuations, with the United States (US) dollar and Swiss franc seeing modest gains as investors seek stability in more secure markets.
Looking ahead
As the global community digests the ramifications of Russia’s nuclear doctrine update, it is clear that the situation remains fluid and highly uncertain. While the chances of nuclear conflict remain unlikely, the updated doctrine serves as a reminder of the unpredictable nature of international relations. The markets are reacting to Russia’s apparent willingness to use aggressive rhetoric and military force to achieve its aims.
Continued volatility seems likely as the West reacts to the evolving geopolitical environment. Traders and investors will be watching closely for further escalations or, conversely, any signs of de-escalation that could bring back a sense of stability. For now, the global economy remains a delicate balancing act, and any missteps in diplomacy or military strategy could tip the scale toward further instability.
TURNING OUR ATTENTION TO THE MARKET
Bonds
US Treasury yields are reacting to mixed sentiment as geopolitical tensions and monetary policy debates shape investor behaviour. The one-year Treasury note yield remains below 4.4%, reflecting heightened demand for safe-haven assets amidst escalating Russia-Ukraine tensions. Moscow’s renewed atomic weapons doctrine has further fuelled this risk-averse stance. However, persistent inflation and robust US economic data, including unexpected declines in initial unemployment claims, have reduced market bets on a US Federal Reserve (Fed) rate cut next month.
In the United Kingdom (UK), 10-year gilt yields climbed to 4.5%, driven by a surprising uptick in October inflation to 2.3%, surpassing the Bank of England’s target. This prompted traders to lower expectations for rate cuts in 2025.
Meanwhile, South Africa’s 10-year bond yield edged above 9.15% following the South African Reserve Bank’s (SARB’s) second consecutive rate cut as it responds to falling inflation. However, the central bank’s medium-term outlook is cautious amid geopolitical uncertainties.
Equities
US stocks gained modestly on Thursday, with the major indices rising by around 0.2%, bolstered by computer chip manufacturer, Nvidia’s recovery and strong earnings from heavy-duty equipment manufacturer, Deere & Company. Nvidia’s shares gained nearly 1.5% after surpassing quarterly forecasts, despite a softer sales outlook, while Deere’s earnings outlook boosted its stock by 3.5%. Bitcoin-related equities like MicroStrategy surged 12% as cryptocurrencies rallied. Conversely tech shares like Palo Alto and PDD Holdings declined due to cautious guidance and missed revenue targets, respectively.
Across the Atlantic, the UK’s FTSE 100 edged higher to around 8,100, driven by gains in energy and mining shares such as BP and Shell, benefitting from rising oil prices. However, multichannel retailer, JD Sports, suffered a 14% drop after warning of volatile trading conditions, leading the index’s losses. Germany’s DAX fell 0.1%, marking its fifth consecutive losing session, weighed down by auto sector declines and geopolitical concerns.
South Africa’s JSE index advanced, supported by strong performance in retail and financial sectors, with Mr Price posting a 9% surge following robust earnings.
Commodities
Geopolitical tensions have fuelled a rally in safe-haven commodities. Gold extended its upward streak, surpassing $2,660/ounce as investors sought refuge amidst escalating Russia-Ukraine tensions and the US’s veto of a Gaza ceasefire resolution.
Brent crude futures surged 2% to $74.30/barrel, driven by reports of Ukraine’s use of Western-supplied long-range weapons and Russia’s intercontinental missile response. These developments heightened supply concerns, further supported by speculation that the expanded Organisation of the Petroleum Exporting Countries, OPEC+, might delay output increases during its 1 December meeting. However, a build in US crude and gasoline inventories limited additional price gains, signalling mixed market sentiment.
Currencies
The US Dollar Index hovered near two-year highs at 96.6, buoyed by its safe-haven appeal amid geopolitical unrest. Fed policymakers offered mixed signals on future rate decisions, with markets now pricing in a reduced likelihood of a December rate cut.
The euro weakened to $1.052/€, its lowest level since October 2023, as it comes under pressure from dollar strength and concerns about eurozone vulnerabilities highlighted in the European Central Bank’s Financial Stability Review.
Meanwhile, the pound fell below $1.27/£ despite hotter-than-expected UK inflation, as geopolitical risks overshadowed domestic economic signals.
The South African rand edged higher to R18.00/$, supported by the SARB’s dovish stance and stronger gold prices, though gains were limited by the robust dollar and global geopolitical uncertainties.
The dynamic interplay across asset classes underscores the profound influence of geopolitics and central bank policies on market trajectories.
Key indicators:
USD/ZAR: 18.09
EUR/ZAR: 18.95
GBP/ZAR: 22.76
GOLD: $2,685 BRENT CRUDE: $74
