Headlines the world over have been captured by the growing tensions between the Russian Federation and Ukraine in recent days. A stock market drop last Friday may have given traders a first taste of the volatility that could hit markets if Russia invades Ukraine; if American intelligence assessments are proven correct and war breaks out in eastern Europe, the world economy could be sent into a frenzy.
American Warnings Raise Uncertainty
Last Friday, February the eleventh, the White Houses’ national security advisor, Jake Sullivan, made a chilling pronouncement. According to estimations made at the top levels of the U.S.’ foreign intelligence apparatus, the Russian army may be planning an imminent invasion of its neighbour to the south. As a result, American and British citizens have been urged to leave Ukraine as soon as possible.
Despite world leaders from French president Emmanuel Macron to German Chancellor Olaf Scholz doggedly attempting to defuse tensions between the two post-Soviet states, Russia has moved over one hundred thousand troops to the border region and has conducted several military exercises in the area. The Russian government has continued to deny that it is considering offensive action to prevent Ukraine from joining the North Atlantic Treaty Organization (NATO), but investors in New York may have been less than reassured.
Wall Street traders may have already been in a risk-averse mood due to the continued rise in U.S. inflation coupled with growing apprehension that the Federal Reserve could move to raise interest rates by more than expected by March. Therefore, this geopolitical uncertainty may have come at a most inopportune time.
On Friday, the S&P 500 (USA 500) dropped by 1.9%. The Dow Jones Industrial Average(USA 30) dipped 1.4%, while the tech-heavy Nasdaq (US-TECH 100), which might tend to disproportionately suffer from the effects of risk aversion due to its many tech- and growth-stock listings, fell by nearly 2.7% on Friday. These sharp drops put a halt to the New York indices’ upward progress over the past two weeks. It seems to be clear that the markets may already be pricing in the potential effects on international trade of a shooting war in Ukraine.
The stock selloff observed last Friday has not been limited to American shores. On Monday, key indices in Asia fell as well. In Tokyo, the Nikkei 225 (Japan 225) index hit the skids to the tune of 2.2%, while Hong Kong’s Hang Seng (Hong Kong 50) dropped by 1.5%.
Europe hasn’t been spared from the stock fallout either. As of the time of this writing, Germany’s DAX (Germany 40) index, London’s FTSE (UK 100), and the Milan-based FTSE MIB (Italy 40) were all on a downtrend, by over 3%, nearly 1.7%, and over 3.4% respectively. The potential risks posed by the war drums beating on the Ukrainian border may already be felt at both ends of the Eurasian landmass.
Energy Turmoil on the Horizon?
Another concrete fear that could come to fruition were a land invasion of Ukraine to materialise is an energy supply shock. Russia, an OPEC+ country, exports over two million barrels of Crude Oil to the West on a daily basis. If the sanctions hinted at by the Biden administration are implemented, this pipeline could be stopped up, resulting in Oil’s price pumping skyward.
Oil’s (CL) price has already been on an upward trend recently, rising 41% to nearly $93 per barrel in response to rebounding demand in major economies since the beginning of last December. Analysts from JPMorgan (JPM) have already begun ringing alarm bells, stating that Oil’s price per barrel hitting triple digits for the first time since 2014 could push U.S. inflation to 8%, giving the Fed even less room to manoeuvre. A further jump to $150 could even erase the gains the global economy has made since the doldrums of the COVID-19 shock.
The Russian Federation’s role in global commodities markets is not limited to black gold; the world’s largest country is also a key supplier of Natural Gas (NG) to the European Union. Although as of the time of this writing, Natural Gas’ price has only risen by just under 2.9% for the day, many market watchers are positing that a war in Ukraine could send the cost of this key energy source up sharply.
Traders in American markets may have already been struggling to weigh their next moves as inflation in the United States continues to rise and the prospect of the Federal Open Market Committee taking a stricter line on monetary policy to stabilise the economy materialises. Now that, according to the estimations of many senior national security personnel, war in Europe could be growing closer, further stock sell-offs and rises in energy costs could very well become the order of the day. The jury is still out on whether these fears in the White House and Wall Street are truly warranted, or whether markets will recover as quickly as they dropped.