Why Markets Rebounded So Quickly After Russia’s 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 the invasion began last week, hundreds of people have been killed and more than half a million have fled their homes to take refuge in other countries. The already monstrous human toll is likely to worsen further in the days and weeks to come as Russian forces intensify their bombardment of Ukrainian cities.

However, Wall Street does not see things with the same concern. Money and profits are what count in New York’s trading floors; human suffering not so much.
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Over the past week, the all-consuming pessimism of investors has quickly given way to sanguine optimism. In short, fears that the crisis could turn into a global conflict have turned into something far less calamitous. Instead of impending global annihilation, the money wizards of Wall Street now see the NATO alliance as stronger than ever, and a seemingly weak Russia rejected by much of the world. This has led to a collective forecast that the conflict, while horrific, will not be as severe as previously thought.

“Initially, the invasion was seen as a global conflict, but investors later narrowed it down to a regional conflict,” says Jack Ablin, chief investment officer at Cresset Capital. “The sentiment has perked up a bit since the matter was reassessed.”

A strange confluence of Wall Street worries

What has happened recently in the stock market is worth examining. Long before the invasion, Wall Street was already worried about the possibility of the Federal Reserve raising the cost of borrowing later this year. That concern led investors to bail out stocks and sent the S&P 500 index down about 8% in the year to Friday. Most of this decline occurred well before the start of the Russian invasion early last week. The Ukrainian crisis only added to the market losses.

“Investors were trying to price two things at once,” says Art Hogan, chief market strategist at National Securities Corporation.

In other words, stock traders on Wall Street were analyzing the likely effects of war in Europe, as well as the impact of possibly higher interest rates. Both of these factors had the potential to, at worst, destroy corporate profits or, at the very least, undermine them. Figuring out what would happen was part of what caused market volatility last week and sent investors into a spiral of fear that peaked mid-week.

“It came to a head on Wednesday with a crescendo of selling, except for gold and energy,” Hogan said.

The price of Brent crude oil, Europe’s benchmark, soared well above $100 a barrel for the first time since 2014 on fears that Russia’s oil supply could be disrupted. Gold jumped 3.9% above $1,900 per troy ounce as investors sought a safe haven for their money.

Market reversal mid-week

However, by Thursday sentiment had shifted to risk, meaning investors were once again willing to bet on so-called risky assets like stocks. In short, their worries about the seriousness of the Fed and the war on Wall Street had not materialized. The two previously troubling issues have been downgraded in the minds of bankers.

Of course, the case wasn’t over, as alarming headlines continued to roll in. However, the underlying trend was seen as positive and helped cement the idea that the outlook for the global economy is better than expected.

Over the weekend, Western allies, including the United States, European Union, United Kingdom and others, took the unprecedented step of blocking some Russian banks from accessing the payment system. international known as SWIFT. This act will increasingly paralyze the country’s economy, because capital cannot enter Russia so easily. “Rather than go to war, they said choke the Russian economy,” says Marc Chandler, chief market strategist at currency trader Bannockburn Global Forex.

Following the SWIFT ban, the ruble plunged to a record high. It is now worth less than a US penny. The fall prompted Russia’s central bank to more than double its key borrowing rate to 20% in an effort to defend its currency.

It’s not just money matters that have changed. The weekend seems to have changed the facts on the ground in Ukraine significantly. For now at least, the advance of the Russian army has slowed in the face of fierce resistance, and the two largest cities, Kiev and Kharkiv, remain under Ukrainian control.

Perhaps the worst news is that Russian President Vladimir Putin has announced that he will put his nuclear deterrent forces on high alert. This raised fears that Russia was ready to escalate the conflict.

Russia brings NATO closer

However, calm heads prevailed; the United States did not react by raising its own nuclear status. “It’s not chess, it’s poker, and the US called Russia a bluff,” Chandler said.

Separately, Sweden and Finland have indicated they may wish to join NATO, the US-led Cold War military alliance. Meanwhile, Germany announced it would increase military spending to 100 billion euros ($112 billion) in this year’s budget. It’s something several US presidents have demanded, but Europe’s biggest economy has failed to comply so far. Germany has said it will also send arms to Ukraine, ending its long-standing post-World War II stance that it will not sell arms to war zones.

One consequence of a reinvigorated NATO will be that more forces will be stationed in Europe on a near-permanent basis, Chandler says. In particular, a more united military front can cause other potential adversaries to avoid conflict.

The war is unlikely to end soon. Russian forces continue their offensives against the main Ukrainian cities. And it is possible that the fighting will intensify. However, so far the stock market’s prediction is that the conflict will not spread far beyond Ukraine’s borders. Of course, that could change in the blink of an eye.

The result so far is that financial markets seem relatively calm, which should give investors some confidence. “Given what was potentially at stake – nuclear war – the market response was surprisingly orderly,” Chandler said. “It’s conducive to better prospects than a month ago.”


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