Trade Wars

The war in Ukraine has investors thinking of a second Cold War

Since the fall of the Soviet Union, investors have enjoyed decades of global economic stability in which military conflict and foreign diplomacy played a lesser role in market movements.

But Russia’s invasion of Ukraine is the clearest sign of a recent shift in this dynamic, as increased jostling between powerful nations will have far-reaching consequences for investors.

The biggest military conflict in Europe since World War II – combined with simmering tensions between the United States and China – has investors watching shifts in international power dynamics more closely than they have. done for a long time.

“There have been more global geopolitical tensions for several years – the friction between China and the rest of the world, China and the United States in particular, does not go away,” said Daniel J. Ivascyn, chief investment officer. at PIMCO. , a fund manager that oversees $2.2 trillion in assets. “This situation in Russia further complicates some of these broad global relationships, and it’s absolutely an increased topic of conversation with our investors.”

Financial markets have long been sensitive to geopolitical events – elections, supply disruptions and trade tensions – which can cause prices to fluctuate. And in just days, the invasion of Ukraine unleashed a series of economic maneuvers that can quickly transform how countries raise money, where they buy raw materials, and with whom they do business.

The United States and its European allies have said they will freeze all Russian central bank assets held by American financial institutions, making it harder for the central bank to support the rouble. New sanctions have essentially banned some Russian banks from carrying out international transactions. British oil giant BP has said it will “exit” its nearly 20% stake in Rosneft, Russia’s state-controlled oil company, which was valued at $14 billion last year. And Norway’s sovereign wealth fund, the world’s largest, said it would divest itself of its Russian investments.

These decisions – along with Russia’s status as the world’s third-largest oil producer, behind the United States and Saudi Arabia – shook markets around the world. Commodity traders seek to redirect the global flow of oil, natural gas, metals and grains. And stock traders who already faced uncertainty as governments and central banks grappled with the fallout of the pandemic now face armed conflict that could cripple any business that depends on these materials.

The S&P 500 fell for a second consecutive month in February, including rapid swings in recent days as fighting raged and financial sanctions had an immediate impact on the Russian economy. The ruble plunged to a record low against the dollar and oil futures soared above $100 a barrel.

Jason Schenker, president of Prestige Economics, a forecaster in Austin, Texas, described renewed tensions between Western nations and Russia as a second Cold War.

“There’s this competition for global influence and global power, but now the stakes have been raised,” Schenker said. “We could be in for a long battle of sanctions and soft power diplomacy. And we could see the cascading risks of further military action.

That risk was clear on Tuesday, when former Russian Prime Minister Dmitry Medvedev warned that economic wars “turn into real wars quite often”, prompting French Finance Minister Bruno Le Maire to backtrack on an earlier statement that Europe was ready for “all-out economic and financial war against Russia. M. Le Maire said his use of the word “war” was inappropriate.

Although the foray into Ukraine was a tangible and clear example of how geopolitical events are increasingly affecting markets, change was already well underway.

Tensions have been escalating between the United States and China, its biggest trading partner, for years, especially with the trade war under President Donald J. Trump’s administration that included tariffs on a wide range of Chinese goods in 2018. But the jockey has since: Beijing has moved to curb companies that list their shares in the United States while giving Wall Street banks a freer hand to operate within its borders , which means that the business investors do there is done on Chinese terms.

Russia’s attack on Ukraine and moves to isolate it could bring it even closer to China, which has been more circumspect than other countries about the offensive. It has also sparked heightened unease about China’s relationship with Taiwan, the self-governing island claimed by Beijing. Although there are no signs that an invasion of the island is imminent, China regularly sends warplanes to Taiwan, and analysts said Beijing has made it clear that it would not rule out a military action to absorb the island.

Taiwan plays a crucial role in the global supply chain of semiconductor chips that power things as diverse as iPhones and cars, and is an important trading partner of the United States, which imports billions of dollars. of electric machines on the island.

Any military action in Taiwan would spell seismic change for the global economy, and investors and companies are closely watching the global economic effects of sanctions on Russia as a test case, said Karl Schamotta, chief market strategist at Corpay, a global payment company. .

Sanctions on Russia resemble old-fashioned capital controls, signaling a renewed willingness by governments to use economic tools to achieve foreign policy goals, said Toronto-based Schamotta. This can come as a shock to businesses and traders who have grown accustomed to moving hundreds of millions of dollars across borders quickly and easily.

“There is going to be sand in the gears of the global economic machine, on purpose,” he said. “Governments are going to try to slow down how things move across borders and how much money can move from place to place, and it’s a whole different world if you’re a big multinational – it makes business much more difficult.”

The fighting, in itself, has not hampered the growth of financial markets. After the September 11 attacks, for example, the stock market remained closed for four days and reopened with a sell-off. But the effect was temporary, and stock markets rose steadily even as the United States fought wars in Iraq and Afghanistan in the decades that followed. The most serious interruption was a financial crisis, not a military one, in 2008.

After analyzing the performance of the S&P 500 since 1945, UBS Global Wealth Management found that markets typically fall in the first week of key military conflicts. But in 14 of the 18 cases, they increased within three months.

“Valuations have fallen, so some of the risks have already been priced in,” Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, wrote in a note. “We continue to expect above-trend global growth as countries lift Covid-19 restrictions.”

Kristina Hooper, chief global market strategist at Invesco, which manages $1.6 trillion for clients including pension funds, insurance companies and individual investors, said the fighting in Ukraine was of greater concern. because of their human toll. She expected small gains for the US stock market this year, but that those gains would come with increased volatility; geopolitical considerations only add to the murky conditions investors already face as the Federal Reserve plans interest rate hikes to curb inflation.

“There’s an awful lot of uncertainty out there,” she said.

In the near term, Schamotta said, investors will likely continue to buy safe-haven assets like the US dollar or Japanese yen and avoid risky assets like stocks as Russian forces continue to push into Ukraine. But even if there is a quick and peaceful resolution, the conflict will have lasting effects, he said.

“In the long term, investors will not forget this episode,” he said. “It’s very, very clear that an economic war is underway and as such, I think investors are going to be more cautious in the years to come.”