Since the fall of the Soviet Union, investors have enjoyed decades of global economic stability, in which military conflicts and foreign diplomacy play a reduced role in market movements.
But Russia’s invasion of Ukraine is the clearest sign of a recent change in this dynamic, as intensified clashes between powerful nations will have serious consequences for investors.
The biggest military conflict in Europe since World War II – combined with boiling tensions between the United States and China – has led investors to monitor changes in the dynamics of international power more closely than they have in a long time.
“Currently, there is more global geopolitical tension in the last few years – the friction between China and the rest of the world, China and the United States in particular, is not disappearing,” said Daniel J. Ivaskin, chief investment officer at PIMCO, is a fund manager who monitors $ 2.2 trillion in assets. “This situation in Russia further complicates some of these broad global relationships, and this is an increasingly common topic of conversation with our investors.
Financial markets have long been sensitive to geopolitical events – elections, supply disruptions and trade tensions – that can drive prices. And in just a few days, the invasion of Ukraine has sparked a series of economic maneuvers that could quickly change the way countries raise money, where they buy raw materials and who they do business with.
The United States and its European allies have said they will freeze all Russian central bank assets held by US financial institutions, making it difficult for the central bank to maintain the ruble. The new sanctions have essentially banned some Russian banks from conducting international transactions. British oil giant BP has said it will “come out” of its nearly 20 percent stake in Rosneft, Russia’s state-owned oil company, which was valued at $ 14 billion last year. And the Norwegian sovereign wealth fund, the world’s largest, has said it will give up its Russian investment.
These moves – along with Russia’s status as the world’s third-largest oil producer after the United States and Saudi Arabia – have shaken markets around the world. Merchants are figuring out how to redirect the global flow of oil, natural gas, metals and cereals. And stockbrokers, who are already facing uncertainty as governments and central banks grapple with the effects of the pandemic, now have to deal with armed conflict that could hamper any business that relies on these materials.
The S&P 500 fell for the second consecutive month in February, including rapid fluctuations in recent days as fighting raged and financial sanctions had a direct impact on the Russian economy. The roll fell to a record low against the dollar, and oil futures rose to over $ 100 a barrel.
Jason Schenker, president of Prestige Economics and a forecaster in Austin, Texas, described the resurgence of tensions between Western nations and Russia as a second Cold War.
“There is this competition for global influence and global power, but now the stakes are high,” Mr Schenker said. “We can face a long battle with sanctions and soft power diplomacy. And we could see cascading risks of further military action. “
This risk was clear on Tuesday when former Russian Prime Minister Dmitry Medvedev warned that economic wars “often turn into real”, prompting French Finance Minister Bruno Le Mer to back away from an earlier statement that Europe was ready for a “total economic and financial war against Russia. Mr Le Mer said that the use of the word “war” was inappropriate.
Although the invasion of Ukraine is a tangible and clear example of how geopolitical developments are increasingly affecting markets, change has already taken place.
Tensions have escalated between the United States and China, their largest trading partner in commodities, for years, especially with the trade war during President Donald J. Trump, which included tariffs on a wide range of Chinese products in 2018. But since then, jockey has continued: Beijing has moved to take over companies listing its shares in the United States, while giving Wall Street banks more freedom to work within at its borders, which means that the business that investors do there is under Chinese conditions.
Russia’s attack on Ukraine and its isolation efforts could push Russia even closer to China, which has been more cautious than other countries about the offensive. It has also raised concerns about China’s relations with Taiwan, the self-governing island claimed by Beijing. Although there are no indications that an invasion of the island is imminent, China regularly sends fighter jets to Taiwan, and analysts say Beijing has made it clear that it does not rule out military action to take over the island.
Taiwan plays a crucial role in the global supply chain of semiconductor chips that power a variety of things such as iPhones and cars, and is an important trading partner with the United States, which imports billions of dollars of electric machines from the island.
Russia’s attack on Ukraine and the global economy
Growing concern. Russia’s attack on Ukraine could cause dizzying spikes in energy and food prices and could scare investors. The economic damage from supply disruptions and economic sanctions would be severe in some countries and industries and unnoticed in others.
Any military move against Taiwan would cause a seismic shift in the global economy, and investors and businesses are closely monitoring the global economic effects of sanctions on Russia as a test case, said Carl Chamotte, chief market strategist at Corpay, a global payment company. .
Sanctions against Russia resemble the old control of capital, signaling the renewed readiness of governments to use economic instruments to achieve foreign policy goals, said Mr. Chamotta, who is based in Toronto. This could come as a shock to companies and retailers that are accustomed to transferring hundreds of millions of dollars across borders quickly and easily.
“Sand will be put in the gears of the global economic machine, on purpose,” he said. “Governments will try to slow down how things move across borders and how much money can be moved from one place to another, and that’s a whole different world if you’re a big multinational corporation – that makes business a lot harder.”
The struggle alone does not hinder the growth of financial markets. After the September 11 attacks, for example, the stock market remained closed for four days and reopened for a sharp sell-off. But the effect was temporary, and stock markets went up, even as the United States waged wars in Iraq and Afghanistan in the following decades. The worst was a financial crisis, not a military crisis in 2008.
After analyzing the performance of the 1945 S&P 500, UBS Global Wealth Management found that markets typically fell in the first week of key military conflicts. But in 14 of the 18 cases, they increased within three months.
“Estimates have been reduced, so some of the risks have already been identified in the price,” said Solita Marcelli, chief investment officer for North and South America at UBS Global Wealth Management. “We continue to expect global growth above the trend as countries remove restrictions on Covid-19.
Christina Hooper, Invesco’s chief global market strategist who manages $ 1.6 trillion for clients, including pension funds, insurance companies and individual investors, said fighting in Ukraine was more worrying because of the casualties. She expected small gains for the US stock market this year, but those gains will come with increased volatility; geopolitical considerations only contribute to the cloud conditions that investors are already facing, as the Federal Reserve plans to raise interest rates to reduce inflation.
“There’s an awful lot of uncertainty there,” she said.
In the short term, Mr Chamota said, investors are likely to continue to buy asylum assets such as the US dollar or the Japanese yen and avoid risky assets such as stocks as Russian forces continue to put pressure on Ukraine. But even if there is a quick and peaceful resolution, the conflict will have lasting consequences, he said.
“In the long run, investors will not forget about this episode,” he said. “It is very, very clear that the economic war is going on and as such, I think investors will be more careful in the coming years.