Market Impact & Implications of Ukraine War – Part III
This post was originally written on February 28, 2022, 6:01 PM EST.
This morning markets were dominated by the repercussions of the severe sanctions imposed on Russia by the European Union.
Russian banks’ ability to use the European payments system (SWIFT) were severely curtailed. Russian assets around the world continue to be frozen. Switzerland joined those sanctions today. Markets acted remarkably well into the close, down only 0.24%. Financials, especially the banks in Europe, took the brunt of selling activity. Despite very little credit exposure among many of these banks to Russia, whenever the flow of payments is disrupted, it creates unintended consequences. Despite best efforts, financial sanctions are never asymmetrical in impact and many leaders in the European capitals have already warned that sanctions on Russia will have global consequences. (JPMorgan and Citibank actually lobbied the Biden administration not to block Russian banks on SWIFT, citing broad fallout in financial markets – source: Bloomberg). Sanctions are designed not to hurt payments for energy from Russia, in order not to disrupt the flow of natural gas of Europe, but the Biden Administration’s freezing of US-dollar assets held in the US by the Russian Central Bank, takes away a key Russian offset (higher oil & gas revenues) to withstand these sanctions. We will see how this plays out over the next week.
What we are watching today in the bond market: There is a flight back to safety with the 10-year Treasury bonds trading up and their yields are back down, at 1.82%.
Equity markets: The market (S&P500) held at the bounce-back levels from Thursday and Friday. Risk-off sectors like semiconductors and financials continue to slide. Market showing some support at 4,222. So far so good! See chart below.
- Cyber security stocks like Palo Alto are now up for the year.
- Tech stocks up for the day: AAPL, GOOGL, MSFT, FB, ADBE, QCOM — good follow through from Thursday and Friday!
- Gold up 4.3% for the year and trying to break out.
- Energy stocks with domestic exposure to oil and gas production continue to go up
- More economically sensitive consumer and industrials stocks bounced today
On the military front, there is a narrative evolving that the Russian invasion is meeting strong resistance from the forces left defending the country and that Russia’s strategy to take Kyiv may fail. It is unclear what that means for markets. A prolonged stalemate would not be a good outcome in any case. Bordering states to Ukraine continue to absorb refugees. On the diplomatic front, the meeting at the Belarus border between Russian and Ukrainian officials ended with no agreement, but they decided to meet again. Perhaps there is a silver lining.
The new German Foreign Affairs Minister Baerbrock (former Green party head) gave her support to coal production near-term to bridge the potential energy impasse created by the conflict. The new German Government was also supportive of higher expenditure on defense as a percentage of GDP (now just 1.5% of GDP), a clear shift in policy.
As of this writing, the market is down 8.2% year-to-date and we expect some more volatility ahead. The Tech-heavy Nasdaq is down 15% off the high in early November. Given the lack of alternatives, while inflation is at over 7%, equities remain the only game in town and should attract money flows once the geopolitical picture becomes clearer.