Russia’s aggression has little direct impact on most U.S. companies, but military conflict isn’t good for financial markets.
U.S. stocks have dropped for the past two days, thanks to Russia’s invasion of Ukraine, and they may have further to go.
Russia’s aggression has little direct impact on most U.S. companies, but military conflict isn’t good for financial markets.
“We can expect markets to remain volatile as they will have knee-jerk reactions over the next few days as the situation develops,” said Nigel Green, chief executive of financial adviser deVere Group, according to MarketWatch.
The S&P 500 recently stood at 4,282.25, down 0.52%, and has slid 10% year to date. The market is now in correction territory after peaking Jan. 3. A correction is generally defined as a loss of 10% to 20%.
The Russia-Ukraine conflict has driven commodity prices higher amid concern the fighting and sanctions placed on Russia will curb its exports of oil and other commodities. Russia produces about 6% of the world’s aluminum supply and 7% of its mined nickel, Reuters reports.
Brent crude oil, the global benchmark, recently traded at $97.60, up 0.78%, and has soared 42% since Dec. 1. Rising commodity prices could boost inflation. Higher inflation by itself is bad for stocks.
And it could lead the Federal Reserve to raise interest rates more aggressively, which also could pressure stocks by stifling growth and making bond yields more attractive.
Interest-rate futures traders have priced in a 79% probability that the Fed will lift rates by at least 1.5 percentage points this year.
Many investors already were bearish on stocks before Russia’s invasion, amid the threat it would happen and thanks to raging U.S. inflation and fear of Fed rate hikes. U.S. consumer prices soared 7.5% in the 12 months through January.
In the four weeks through Thursday, short sellers increased their bets against the SPDR S&P 500 ETF Trust (SPY) – Get SPDR S&P 500 ETF Trust Report by $8.6 billion, according to forecasts of data analytics firm S3 Partners, The Wall Street Journal reports. That would be the largest increase since the four weeks ended in early March 2021.
“Sentiment is really poor. People are nervous,” Danny Kirsch, head of options at Piper Sandler, told the Journal. More of his clients have decided to hedge against declines by stocks recently, he said.
Getting back to Ukraine, how the conflict will play out and what it will mean for stocks is for now uncertain.
“At this moment, it is not clear whether we are just seeing geopolitical tension, which will ultimately be managed through diplomacy, or whether we are heading toward a war-like situation,” Geetu Sharma, investment manager at AlphasFuture, told Reuters.
Marko Kolanovic, co-head of global research at JPMorgan Chase, is bullish on U.S. stocks, based on Covid waning and economic recovery in China, Bloomberg reports. But he sees the Ukraine conflict as a wild card.
“You add the geopolitical friction points like Ukraine, and you can really produce some large moves which we think could still play going forward,” he told Bloomberg.
“Everyone’s talking about Russia and Ukraine, and it’s a very idiosyncratic thing. But it is critically tied to oil, gas and global energy security.
“We like exposure to energy directly by sector, but also some of the countries. Perhaps Russia is not the right place to invest, but maybe some of the countries that are proxies for commodities, we like that as well.”
If you’re thinking of diving into Russian stocks now, ignore the urge, writes Randall Forsyth of Barron’s. “Don’t be tempted to go bottom-fishing in Russia,” he said. “While equities and the ruble are down sharply on the Russian invasion of Ukraine, odds favor more volatility that could spell still steeper losses ahead.”
