Stocks have had a rough couple of trading days. Headlines from Eastern Europe have been keeping traders busy. The U.S. has closed its embassy in Kyiv, and it and allies have warned that a Russian invasion of Ukraine could come as soon as this week.
While gut-wrenching and potentially tragic for people in danger of living in a war zone, geopolitical shocks tend to be short-term hits to the market. What continues to matter most for the prospects for stocks and bonds this year is the path of Federal Reserve policy.
“The Russia-Ukraine border crisis complicates the near-term market outlook,” wrote Keith Lerner, co-chief investment officer at Truist Advisory Services. “That said, history suggests these types of events, which can be devastating from a humanitarian standpoint, tend to have a fleeting market impact unless they lead to a recession. Our work suggests recession risk in the U.S. remains low. Rising geopolitical risks, alongside the coming Fed transition, argue for continued choppier waters in the markets near term.”
It’s tough to draw a direct line from Ukraine to the S&P 500 SPX-0.38%, but the unfolding situation could still have significant and negative second- or third-order implications. The index finished Monday down 0.4%, the Dow Jones Industrial Average DJIA-0.49% lost 0.5%, and the Nasdaq Composite COMP-0.00% closed just below break-even. There were hints of a flight-to-safety instinct among investors. The price of gold GC00-0.94%
Russia’s status as a major supplier of natural gas and oil to Europe means that the already tight global energy supply is at risk of further disruption. Oil and gas inventories are low, production hasn’t returned to prepandemic levels, and demand continues to increase as the global economy recovers.
The result has been crude oil prices steadily pushing toward $100 a barrel. West Texas Intermediate WBS.1-3.58% gained 2.5% Monday, to $95.46—up 27% in 2022 to its highest price since 2014. Brent BRN00-3.24%, the international oil benchmark, was trading for almost $97 a barrel Monday. U.S. natural gas prices have dropped from their recent highs a few weeks ago, but remain at elevated levels.
War in Ukraine that interrupts the flow of fuel through the region will mean even higher oil and gas prices, which will sooner or later add to the upward pressure on already decades-high inflation in the U.S. As seen last week, the market is laser-focused on the monthly measures of inflation and their implications for the Fed’s next interest rate move. Disruption to other commodity exports from Russia could impact individual companies or industries, such as titanium and Boeing BA-1.06% (ticker: BA BA-1.06% ).
Russia’s status as a major supplier of natural gas and oil to Europe means that the already tight global energy supply is at risk of further disruption. Oil and gas inventories are low, production hasn’t returned to prepandemic levels, and demand continues to increase as the global economy recovers.
The result has been crude oil prices steadily pushing toward $100 a barrel. West Texas Intermediate WBS.1-3.58% gained 2.5% Monday, to $95.46—up 27% in 2022 to its highest price since 2014. Brent BRN00-3.24%, the international oil benchmark, was trading for almost $97 a barrel Monday. U.S. natural gas prices have dropped from their recent highs a few weeks ago, but remain at elevated levels.
War in Ukraine that interrupts the flow of fuel through the region will mean even higher oil and gas prices, which will sooner or later add to the upward pressure on already decades-high inflation in the U.S. As seen last week, the market is laser-focused on the monthly measures of inflation and their implications for the Fed’s next interest rate move. Disruption to other commodity exports from Russia could impact individual companies or industries, such as titanium and Boeing BA-1.06% (ticker: BA BA-1.06% ).
And some commentators have posed a longer-term but potentially even more concerning ramification of a successful Russian invasion of Ukraine: an emboldened China that’s more likely to make a military move on Taiwan. An invasion of the East Asian island nation would be catastrophic for many sectors of the global economy that rely on the semiconductors manufactured there.
“Wall Street will be headline driven and it appears risk appetite won’t fully return until Russian troops move away from the border,” wrote Edward Moya, senior market analyst, the Americas, at currency brokerage Oanda.
Both Russia-Ukraine and inflation will remain top of mind in the coming days. Tomorrow morning, the Bureau of Labor Statistics reports the January Producer Price Index. On Wednesday, the typically more dovish Minneapolis Fed President Neel Kashkari is scheduled to speak, when minutes from the Federal Open Market Committee’s late-January meeting are also set to be released. Then more Fedspeak on Thursday: St. Louis Fed President Jim Bullard and Cleveland Fed President Loretta Mester are on deck.
“The combination of central banks focused on tackling above-target inflation and an escalation in Ukraine would be a potentially toxic one for risky assets,” wrote Jonas Goltermann, a senior economist at Capital Economics. “Usually, when market sentiment drops, central banks step in to cushion the blow. But if policymakers remain focused on inflation (which, at least in short term, would probably rise further if a conflict broke out and commodity prices surged), they may not be as willing to ride to the rescue this time around.”
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