On Friday, investors got a hint of the kind of market shock that could turn up if Russia attacks Ukraine.
The spark arrived on Friday afternoon, since Jake Sullivan, the White House national security adviser, cautioned that Russia could invade Ukraine “any day now,” with Russia’s military set to start an attack if given order by Russian President Vladimir Putin.
U.S. stocks extended a selloff to end strongly lower, with the Dow Jones Industrial Average DJIA, -1.43 percent falling by more than 500 points and the S&P 500 SPX, -1.90% dropping 1.9 percent; oil futures CL.1, +4.47% soared to a seven-year high that has crude within hailing distance of $100 a barrel; and a round of buying interest in traditional safe-haven assets smashed Treasury yields while lifting gold, the U.S. dollar, and the Japanese yen.
On Saturday, Putin and United States President Joe Biden were supposed to have a conversation via phone in an attempt to ease tensions.
Analysts and investors have discussed the enduring impact of an attack on financial markets.
Here’s what investors are required to know.
Energy Prices Set to Surge
Energy prices are supposed to pump up in the case of an attack, probably the price of crude will jump above the $100-a-barrel ceiling for the very first time since 2014.
In a statement, Phil Flynn, market analyst at Price Futures Group, told MarketWatch “I think if a war breaks out between Russia and Ukraine, $100 a barrel will be almost assured.” On Friday, U.S. benchmark oil futures CL00, +4.47% CLH22, +4.47% closed at a seven-year high of $93.10, whereas Brent crude BRN00, +0.70% BRNJ22, +0.70%, the global benchmark ended at $94.44 a barrel.
“More than likely we will spike hard and then drop. The $100-a-barrel area is more likely because inventories are the tightest they have been in years,” Flynn added on Friday while explaining that a monthly report from the International Energy Agency cautioning that the crude market was prepared to strengthen further develops any potential supply disruption “all that more ominous.”
Apart from crude, Russia’s contribution as a chief supplier of natural gas to Western Europe could cause prices to jump in the region. Overall, surging energy prices in Europe and across the world would be the most likely way a Russian attack would amplify volatility throughout financial markets, analysts claimed.
Fed Versus Flight to Quality
Treasurys are among the well-known covers for investors during bursts of geopolitical vagueness, so it didn’t come as a surprise to see yields slide around the curve Friday afternoon.
Treasury yields, which shift the opposite direction of prices, were exposed to a fallback following increasing Thursday on the grounds of a hotter-than-anticipated January inflation report that witnessed traders’ price in fierce rate surge by the Federal Reserve starting with a potential half-point surge in March.
Analysts and investors discussed how an attack in Ukraine could have an impact on the Federal Reserve’s plans for strengthening monetary policy.
In emailed comments, Jay Hatfield, chief investment officer at Infrastructure Capital Management said if Ukraine is invaded “it adds more credence to our view that the Fed will be more dovish than the market currently believes as the war would make the outlook even more uncertain.”
Others claimed that a surge in energy prices would probably emphasize the Fed’s concerns about inflation.
Stocks and Geopolitics
Vagueness and the consequent volatility could lead to more bumpy sledging for stocks in the coming days, but analysts said that U.S. equities tend to overcome geopolitical shocks comparatively swiftly.
While pointing to the chart mentioned above, Ryan Detrick, chief market strategist at LPL Financial, said in a statement “You can’t minimize what today’s news could mean on that part of the world and the people impacted, but from an investment point of view we need to remember that major geopolitical events historically haven’t moved stocks much.”