Why Markets Bounced Back So Quickly After the Russian Invasion of Ukraine
Just a few days turned the tide of Russia’s invasion of Ukraine—for the world and for Wall Street, but in completely different ways.
Since last week’s invasion, more than half of a million people fled their homes in search of refugee status. As Russian forces intensify their bombardment on Ukrainian cities, the already horrific human toll will only get worse.
However, Wall Street doesn’t view things with the same concern. New York City’s trading floors are focused on profits and money; the suffering of human beings is not.
In the past week, investors have shifted from all-consuming pessimism to sanguine optimism. In other words, fears that the crisis could escalate into a conflict between the world and Russia have given way to something far more positive. Instead of imminent world-wide annihilation, Wall Street’s money wizards now see the NATO alliance as stronger than ever, and a feeble-looking Russia shunned by much of the world. This has led to a collective forecast that the conflict, while awful, won’t be as bad as previously thought.
“Initially, the invasion was seen as likely a global conflict, but then investors downsized it to a regional one,” says Jack Ablin, chief investment officer at Cresset Capital. “Sentiment perked up a bit since the matter has been reassessed.”
Strange confluence between Wall Street concerns
It is worthwhile to review what happened in the stock exchange recently. Wall Street worried that the Federal Reserve would raise interest rates later in the year, long before the Invasion. That concern led investors to bail on stocks and sent the S&P 500 index down approximately 8% in the year through Friday. The majority of this decline occurred long before the Russian invasion began early last week. Market losses were only exacerbated by the Ukraine crisis.
“Investors were trying to price in two things at once,” says Art Hogan, chief market strategist at National Securities Corporation.
Also, Wall Street stock market traders were looking at the effects of possible wars in Europe as well as the effect of potentially higher interest rates. At worst, both factors would have the ability to decimate corporate profits, or even worse, lower them. Working out what would happen was part of what caused last week’s market volatility and sent investors into a fear spiral that reached a peak mid-week.
“It came to a head on Wednesday with a crescendo of selling except for gold and energy,” Hogan says.
Brent crude oil was the European benchmark for oil prices. It rose well over $100 per barrel in the wake of fears that Russia’s oil supplies would be disrupted. Investors sought a safe place to store their cash and gold rose 3.9% to $1,900 per troy ounce.
Reversal in mid-week markets
On Thursday however, investors had shifted to risk-on and were now willing to place bets again on risky assets such as stocks. They were still worried about what the Fed would do to Wall Street, and what the consequences of war on Wall Street. Bankers saw both of these concerns as being less important.
Of course, the matter wasn’t over, as alarming headlines continued breaking. However, this trend is positive and helps to cement the notion that global economic prospects are better than expected.
Over the weekend, the western allies, including the U.S., the European Union, the U.K., and others, took the unprecedented step of blocking some Russian banks’ access to the international payment system known as SWIFT. This act will increasingly cripple the country’s economy—as capital cannot flow into Russia as easily. “Rather than go to war, they said let’s choke off the Russian economy,” says Marc Chandler, chief market strategist at currency trader Bannockburn Global Forex.
The ruble’s record-breaking value has been impacted by the SWIFT ban. It’s now worth less than one U.S. cent. To defend the currency, Russia’s central bank increased its key borrowing rate by more than 20%.
It wasn’t just money matters that changed. It seems that the weekend has shifted some facts in Ukraine. For now at least, the Russian military’s advance has slowed in the face of fierce resistance, and the two largest cities, Kyiv and Kharkiv, remain under Ukrainian control.
Perhaps the worst news was that Russian President Vladimir Putin announced he’d put his nuclear deterrent forces on high alert. There were concerns Russia may be trying to escalate this conflict.
Russia brings NATO closer together
The U.S. has not responded by increasing its nuclear status, but calm heads prevailed. “This isn’t chess, it’s poker, and the U.S. called Russia’s bluff,” Chandler says.
Additionally, Finland and Sweden indicated they might want to join NATO (the Cold War-era military alliance headed by the U.S.). Meanwhile, Germany announced it would increase its military spending to 100 billion euros ($112 billion) in this year’s budget. That’s something that several U.S. presidents have demanded, but the largest European economy has failed to oblige until now. Germany said it would also send weapons to Ukraine, ending its long-standing post-Second World War position that it wouldn’t sell arms into war zones.
Chandler states that an increased NATO force will result in more troops being deployed in Europe on quasi-permanent bases. Particularly, an increased military unity may help to prevent conflict from happening with other potential enemies.
It’s not likely that the war will end soon. Russian forces are continuing their offensives against Ukraine’s major cities. The fighting may intensify. However, so far the prediction from the stock market is that the conflict won’t extend far outside Ukraine’s borders. This could all change quickly.
Investors should feel reassured that so far, financial markets appear relatively calm. “Given what was potentially at stake—nuclear war—the market’s response has been amazingly orderly,” Chandler says. “It’s conducive for a better outlook than we had a month ago.”