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Massive risk-aversion is sweeping through financial markets on Thursday in response to Russia's invasion of Ukraine.

The Russian offensive started in the early hours of the morning in Europe and has been occurring across the country. The mood turned increasingly negative as the morning progressed, with headlines and images displaying the atrocities taking place in Ukraine.

The knee-jerk reaction has been severe across the board and with the situation deteriorating by the hour, we could see further risk-aversion over the coming days. There remains huge uncertainty about how far Russia will go in Ukraine and what the knock-on effects will be across the globe, which could continue to weigh heavily on risk appetite.

This comes at a time when the global economy was already facing numerous challenges as it emerges from the pandemic. There will no doubt be consequences for the global economy, with recent moves in the oil and gas market compounding those pressures that were already being felt by households and businesses this year.

It also creates enormous uncertainty for central banks around the world as, on the one hand, higher oil and gas prices will intensify the inflationary pressures that they're already trying to fight with rate hikes. But on the other hand, if they suppress economic activity and weigh on demand, it could help alleviate some of those pressures they're most concerned about.

As it stands, we're not seeing any massive shift in interest rate expectations but that could change if energy prices continue to rise in response to the Kremlin's actions in Ukraine. In many ways, Russia has passed the point of no return as painful economic sanctions are coming. Just how painful that will be for them and the rest of the world is still to be determined.

Oil above $100 and could keep going

Oil prices are soaring in response to the Russian invasion of Ukraine as traders are forced to price in sizeable risk premiums associated with the conflict. The market is already extremely tight and unable to easily contend with supply issues and, barring a shift in approach from certain producers with excess capacity, that's not going to change.

With oil prices well above $100 - up around 7% on the day - and gas prices surging once more, the question becomes just how far they will go. There's enormous uncertainty around how bad the situation will become in Ukraine and what impact that will have on supplies of oil and gas. The knee-jerk reaction has been strong and we could see prices settle if no further major escalations occur. Unfortunately, that's a massive "if" given how today has progressed.

Gold could eye highs after the invasion

Gold prices are spiking as traders are drawn to the traditional safe haven in these turbulent times. The conflict in Ukraine brings enormous uncertainty which strengthens gold's appeal as both a safe haven and an inflation hedge. The price has already hit its highest level since September 2020 and could have further levels in its sights.

The next big test will be $2,000, where it has only traded above briefly in August 2020, hitting a high that month around $2,072. The worse the situation becomes in Ukraine, the more likely it is that we'll see those levels once more.

By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

Stock markets are off to a decent start at the beginning of the week, one that will be heavily focused on US economic data ahead of the September Fed meeting.

In many ways, it feels a little early for there to be so much attention on the meeting next week and yet, it very much seems that is what is happening. The jobs report a couple of weeks ago threw a massive spanner in the works as far as tapering is concerned but the message coming from policymakers suggests they remain undeterred.

Now that we're into the blackout period, we'll have to rely on the data to form our opinions on what the Fed will decide next week and in the final months of the year, starting with the inflation readings on Tuesday. Any indication that inflation is not as transitory as the central bank currently believes could pile on the pressure to remove stimulus more aggressively and cause some distress in the markets, something investors are very sensitive to.

Central banks are being extremely cautious though and are keen to point out that the removal of emergency stimulus measures is not linked to future rate hikes. The ECB took its foot slightly off the gas last week in what was viewed as a first step towards removing stimulus. It was a cautious first move but perhaps a sign that policymakers are wary about higher inflation.

Oil rising as OPEC forecasts stronger demand next year

Oil prices are rising on Monday, with WTI exceeding $70 once more and reaching its highest level in more than a month. This comes despite demand challenges in the coming months as a result of the Delta variant, which OPEC alluded to in its monthly report. Despite this, demand remains strong supported by output disruptions elsewhere.

The group also revised higher expectations for 2022, when it expects output to surpass pre-pandemic levels. Despite near-term risks to the demand outlook, OPEC+ is continuing to increase its output by 400,000 barrels per day each month, in line with what it agreed in July.

The technical picture is looking better for oil prices following a period of consolidation around the $70 level. Momentum has picked up with the recent move, a sign perhaps that the rally has legs and a period above here can be sustained. The summer highs may now even be in sight once more.

Gold has one eye on the Fed meeting

Much of the market already appears to have one eye on the Fed meeting next week and this is particularly true of gold, which has been hovering around $1,800 for much of the last month.

The case has been building for the Fed to take a more patient approach to tapering which has revitalized the yellow metal but we may need to see more evidence before it takes the next step. It once again failed to break $1,833 after the jobs report, further establishing the level as a key barrier of resistance.

Policymakers have seemingly been keen to ensure the data doesn't distract from the central bank's intentions to taper this year, understanding the importance of effective communication when approaching major policy shifts. That's held gold back even as the data has softened. There's plenty more to come this week but it may trade cautiously still, ahead of next weeks meeting.

Bitcoin testing major support

Bitcoin is coming under pressure once more on Monday, a little under a week after it plunged 17% following its debut in El Salvador. Once again, the cryptocurrency finds itself close to $44,000 where it has previously found strong support. A significant break of this level could be bad news for bitcoin in the near term.

For weeks now, it has been showing signs of topping out, with rallies lacking momentum and the lows being repeatedly tested. A break of $50,000 may have improved its fortunes, alongside it being adopted as legal tender in El Salvador - a massive experiment for the country and bitcoin - but instead, it quickly crashed and it's struggling to find its feet.

You can't write off bitcoin, not when there's so much excitement in the space, but a break below $44,000 could be troublesome. Even another 20% would leave it well above the lows it reached earlier this summer so we shouldn't get too carried away. Maybe Elon Musk will ride to the rescue again.