By Saikat Chatterjee

LONDON, (Reuters) – The world markets are set for another turbulent week following the announcement by Western countries of a severe set of sanctions against Russia in retaliation for their invasion of Ukraine. Fighting intensified on a fourth day.

The U.S. stock market has fallen almost 8% this year. It is on pace for its worst start in a single year since 2009. Worries about Ukraine’s intensifying conflict have shaken global markets.

Wall Street finished higher on Friday as major indices rose between 1.5%-2.5%. However, analysts expect markets to be selling under pressure on Monday.

Peter Kinsella from UBP’s global head FX strategy, stated that “Nobody loves uncertainty”, and investors are also not a fan of uncertainty.

“It seems that we are now in the early stages of a Cold War. This is very clear. It will have a significant impact on sentiment for quite some time.”

On Sunday, Russian military vehicles drove into Ukraine’s second largest city. Explosions rocked the oil and gas facilities on Day 4 of the most brutal assault against a European country since World War Two.

As a result, the United States along with its allies acted to prevent certain Russian banks access to SWIFT’s international payment system. In the days ahead, the measures will also be applied to restrain the Russian central bank’s international reserves. [PnL8N2V117C]

John Marley, the CEO of Forexxtra (a London-based FX consultancy), stated, “Friday’s bounce seemed like a genuine short squeeze. But Monday should bring new selling pressure as SWIFT Sanctions and the increasing likelihood to freeze Russian currency reserve will inflict some serious financial pain across markets.”

Russian aggression comes as investors worry about market valuations and central banks that are hawkish. On Thursday, world stock markets fell to a 10-month low and have been down over 7% this year.

DIALING DOWN RISK

These latest developments may also increase pressure on grain and energy prices. Futures have surpassed $105 per barrel, while wheat futures are at levels not seen since mid-2008. They were last visible on Thursday. However, they eased slightly on Friday.

The latest weekly position data shows investors trying desperately to lower risk within their portfolios.

According to Commodity Futures Trading Commission data, hedge funds reduced long positions on the British Pound while short positions in the yen were cut. Goldman Sachs’ separate data (NYSE:) revealed that outflows were seen from European-focused equity fund while flows to developed markets equities declined into negative territory.

The demand for safe assets is high with U.S. Treasuries as well as German Bunds, Swiss Francs, and U.S. Treasuries likely to be strong. This will happen while traders are assessing the impact of the recent round of sanctions.

Russia’s stock market closed Friday up 20% after Thursday’s 33% record drop. The rouble, however, recovered slightly after dropping to 90 dollars on Thursday. Analysts expect more trouble on Monday.

Ray Attrill (head of FX strategy, National Australia Bank) stated that there is an increased chance of Russia defaulting on its debt. This was last reported in 1998.

Market volatility gauges, which are already high, will likely shoot up on Monday, while investors buying derivative contracts to hedge against future losses is expected to rise.