Here is what a Russian invasion of Ukraine would mean for the markets


Fears of a Russian invasion of Ukraine are growing, prompting analysts and traders to weigh the potential shockwaves in the financial markets.

“If Russia invades Ukraine, trade is buy TY,” Brent Donnelly, CEO of Spectra Markets, wrote in a Friday release, citing 10-year government bond futures.
TY00,
-0.50%
.

Treasury is a traditional haven during periods of geopolitical and economic stress. A rally in the Treasury would cut interest rates, which are moving in the opposite direction of prices. A sale of the treasury has boosted returns, with the 10-year treasury
TMUBMUSD10Y,
1.792%

ended close to 1.77% on Friday after reaching an almost two-year high earlier this week.

The Swiss franc, another popular getaway, can also rally, with the euro / Swiss franc
EURCHF,
-0.02%

The currency pair is likely to fall to CHF 1.03 “on a frozen rope if Russia moves”, Donnelly said. The euro bought 1,043 francs on Friday.

Russia, which has already deployed more than 100,000 troops on Ukraine’s border, began moving tanks, infantry vehicles, rocket launchers and other military equipment westward from bases in the Far East this week. It was reported by the Wall Street Journal, referring to US officials and social media.

Russian President Vladimir Putin is seen using the threat of an invasion as leverage, as Moscow demands that NATO never offer membership to Ukraine or Georgia. Russia has pushed for a number of other demands, including the withdrawal of US and Allied troops from Eastern and Central Europe. Talks this week between Russia, the United States and NATO failed to make a breakthrough. The United States and its allies have promised to respond to any Russian invasion of Ukraine with severe economic sanctions.

Jitters increased on Friday after a cyber attack made the websites of a number of Ukrainian authorities temporarily inaccessible. Ukrainian Foreign Ministry spokesman Oleg Nikolenko told the Associated Press It was too early to say who was behind the attack, “but there is a long history of Russian cyber attacks against Ukraine in the past.”

Russia’s invasion and annexation of Ukraine’s Crimean Peninsula in 2014 sent shockwaves through global markets, but as is often the case with geopolitical outbursts, volatility soon subsided.

“In 2014, US equities had some meaningful downsizing on Ukraine (March and May) but shook off history fairly quickly. I do not think equities are a good way to play this scenario,” Donnelly said.

When it comes to equities, what may happen from previous geopolitical crises may be that it is best not to panic, wrote MarketWatch columnist Mark Hulbert in September.

He noted data compiled by Ned Davis Research examining the 28 worst political or economic crises of the six decades before the 9/11 attacks in 2001. In 19 cases, the Dow Jones Industrial Average
DJIA,
-0.56%

was higher six months after the crisis began. The average increase in six months after all 28 crises was 2.3%. In the aftermath of 9/11, which left markets closed for several days, the Dow fell 17.5% to its lowest level but recovered to trading above the level on September 10 by October 26, six weeks later.

Donnelly said he tends to fade market reactions to political anxiety.

“Geopolitical issues are constantly simmering and if you look back at history, very, very few geopolitical events affect the markets for more than a few days,” he said, noting that there are exceptions – and when they do, “it’s huge.”

US equities made a mixed finish on Friday, which leaves the Dow Jones Industrial Average with 0.9% weekly drop and the S&P 500
SPX,
+0.08%

and Nasdaq Composite
COMP,
+0.59%

each down 0.3%. At the beginning of 2022, the weakness in US equities has largely been blamed a jump in government returns Due to rising inflationary pressures and expectations, the Federal Reserve will be much more aggressive than previously anticipated in terms of raising interest rates and tightening.

VanEck Russia’s exchange traded fund
RSX,
-1.54%

is down 6.6% so far in January and has fallen over a quarter from a more than nine-year high at the end of October. The Russian ruble
USDRUB,

is down more than 9% against the US dollar for about the same distance.

Barrons: As tensions between Russia and Ukraine increase, Russian equities may be too cheap to resist

At the same time, analysts say that investors have not fully priced what an invasion would mean for raw materials, especially natural gas
NG00,
+0.82%
,
wheat
W00,
-0.54%
,
and corn
C00,
+1.79%
,
wrote MarketWatchs Myra Saefong.

Europe is heavily dependent on Russian gas transiting through Ukraine, and especially given that 2022 has begun with record low European gas stocks. An invasion would likely hamper the approval of operations for the newly completed Nord Stream 2 pipeline, which will carry more natural gas directly to Germany, past Ukraine.

Oil futures have increased to begin in 2022, with West Texas Intermediate crude oil
CL00,
+2.62%

US benchmark up more than 11% since calendar reversal, while global benchmark Brent oil
BRN00,
+0.48%

has advanced more than 10%. Both are not far from multi-year highs in November.

Read: Oil rises as analysts warn Ukraine’s crisis could be a “seismic event” for the energy market

“With oil prices steady in the White House’s political red zone and a Russian invasion of Ukraine still a front and central concern, the pursuit of additional barrels is likely to become an increasingly important priority,” wrote analysts at RBC Capital Markets, in a Thursday announcement.



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