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The Resonant Review: Ukraine Invasion Spurs Volatility Across World Markets
March 28th, 2022
Global markets continue to digest what could be a major shift in the world order after Russia invaded Ukraine last week, the most significant military action on the European continent since World War II.
Markets in the U.S. and elsewhere had already been struggling with elevated inflation levels, expectations of global central bank tightening, rising oil prices and interest rates. But Russian President Vladimir Putin’s decision to attack the independent nation to his west heightened uncertainty and stress for global leaders, investors and humanity.
The rolling responses to military developments, economic sanctions and Putin’s actions will cast a shadow over European economic activity for some time, and commodity and energy markets are likely to experience increased volatility in the near term. Investment implications will be far-reaching and play out over an extended period of time.
The situation remains quite fluid, but we have begun to digest and analyze potential implications from last week’s actions, which include:
- Energy prices, which were already significantly elevated year-to-date prior to last week’s attack, have jumped even higher. Russia is one the largest oil and gas producers in the world and any impact on Russian supply will affect global prices for those commodities;
- Europe will bear the brunt of the economic impact as it works through to diversify its energy supply sources. We expect them to place a renewed focus on energy independence as Western Europe is currently dependent on Russian supply for a significant amount of its traditional energy sources. As an example, German economic ministers noted this week that Russia supplies 50% of that country’s (alone) coal, 55% of their natural gas and 35% of their oil;
- U.S. defense spending will likely increase for an extended period of time as our allied nations build up the military capabilities of NATO and European countries in response to Russian aggression;
- 30 years of hope and somewhat-suspended disbelief that Russia could become an integrated and non-threatening economic partner has likely ended. At a minimum, trust has been broken and what Russia might gain geographically it will almost-certainly see its citizenry sacrifice economically and socially. The middle ground would be something like a revised Cold War between a new cohort of the strange bedfellows made from geopolitical competition and economic cooperation with Russia, China, Iran and possibly North Korea aligned on one side against the traditional Western democracies on the other. More-extreme outcomes seem almost unfathomable, but for over 70 years so too was nakedly-aggressive military action by a nuclear power on the European continent.
- At this still relatively-early stage, forecasting the second- and third-order outcomes of such a dramatic change in military and global order is impossible. But we do not view it as a stretch to note that Putin’s actions and the responses to them have likely changed that order. The outcomes politically, geographically and economically will change as well.
Several days out from the initial incursion, there are immediate areas that could determine the impact for world economies. The Ukrainian people have already suffered tremendously and yet have demonstrated remarkable resilience and the free world has rallied in their support. The Biden administration has garnered allies’ backing in instituting already-multiple rounds of sanctions against Russian government and enterprise, Putin and his supporters. It remains unclear whether those or more severe sanctions will influence his behavior, which has gradually intensified. At the time of this writing on the afternoon of February 27th, the most-recent news indicates the possibility of talks between Ukraine and Russia.
U.S. West Texas Intermediate (WTI) Crude ended the week just below $92 a barrel, booking a 1.5% gain for the week, during a rally that saw oil go above $100 a barrel for the first time since 2014. Energy markets will likely continue to be volatile due to an increasingly uncertain supply environment and amid questions about where European countries will draw energy resources from for their population and economies’ needs. It remains unclear whether, and indeed how, Putin might cut off the flow of energy in response to sanctions and how European countries will deal with what could become a challenging winter-to-spring period.
The S&P 500’s initial response to the military hostilities was to the downside but quickly reversed course and the U.S. large cap benchmark index gained 0.8% on the week while the growth-tilted Nasdaq advanced 1.1%. Stocks rose as the situation in eastern Europe made investors increasingly confident that the Federal Reserve will likely moderate their interest rate-hike plans at its upcoming March meeting, due to geopolitical risks and expectations for global growth.
Meanwhile, heightened inflation risks remain. On Friday, the U.S. Commerce Department’s personal consumption expenditures (PCE) index, a measure of core inflation which excludes volatile food and energy, rose 5.2% in January from a year ago and up from 4.9% in December. Given the inflationary backdrop we believe the Fed will have no choice but to move forward with planned rate hikes.
We are hopeful that the armed conflict in Ukraine will come to a swift end limiting the further loss of lives. Market activity at the end of last week suggests hostilities will be contained. Longer term, the unintended consequences of Putin’s actions remain unknown and the shift in national, geopolitical and economic responses will be monitored closely for their impact on global markets.
