Investors weigh potential financial shock waves from Russian invasion

Investors weigh potential financial shock waves from Russian invasion

There are fears of a Russian invasion of Ukraine, prompting analysts and traders to weigh the potential financial-market shock waves.

Brent Donnelly, president of Spectra Markets, wrote in a Friday note: "If Russia invades Ukraine, the trade is buy TY." Treasurys are a traditional haven during times of geopolitical and economic stress. A rally in Treasurys would pull down yields, which move in the opposite direction of prices. A Treasury selloff has pushed up yields, with the 10 year Treasury rate TMUBMUSD 10 Y coming close to 1.77% Friday after hitting a two-year high earlier in the week.

The Swiss franc could rally, with the euro Swiss franc EURCHF likely to fall to 1.03 on a frozen rope if Russia moves, Donnelly said. The euro bought 1.043 francs on Friday.

Russia, which has already placed more than 100,000 troops on Ukraine border, moved tanks, infantry fighting vehicles, rocket launchers and other military equipment west of bases in its Far East, according to the Wall Street Journal.

Russian President Vladimir Putin is seen using the threat of an invasion as a leverage, as Moscow demands that NATO never offers membership to Ukraine or Georgia. Russia has pressed a range of other demands, including that U.S. and allied troops leave NATO's East and Central European members. There was no breakthrough between Russia, the U.S. and NATO this week. The U.S. and its allies pledged to respond to any Russian invasion of Ukraine with harsh economic sanctions.

After a cyberattack left a number of Ukrainian government websites temporarily unavailable, jitters went up Friday. Ukrainian Foreign Ministry spokesman Oleg Nikolenko told the Associated Press that it was too soon to tell who was behind the attack, but there is a long history of Russian cyber assaults against Ukraine in the past. Russia annexation of Ukraine's Crimea peninsula in 2014 sent shudders through global markets, but as is often the case around geopolitical flare-ups, volatility soon subsided.

In 2014, the U.S. equities had some meaningful downdrafts on Ukraine March and May, but they shook off the story rather quickly. I don't think equities are a good way to play this scenario, Donnelly said.

In September, MarketWatch columnist Mark Hulbert wrote, "When it comes to equities, the takeaway from past geopolitical crises is that it is best not to sell into a panic."

He noted that Ned Davis Research compiled data examining the 28 worst political or economic crises over the six decades prior to the 9-11 attacks in 2001. In 19 cases, the Dow Jones Industrial Average DJIA was higher six months after the crisis began. The average six month gain after all 28 crises was 2.3%. After 911 left markets closed for several days, the Dow fell 17.5% at its low but recovered well above its Sept. 10 level by October 26, six weeks later.

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

Geopolitical issues are simmering all the time, and very few geopolitical events impact markets for more than a few days, he said, but noted that there are exceptions and when they happen, it is huge. The Dow Jones Industrial Average fell by 0.9% Friday, while the S&P 500 SPX and Nasdaq Composite COMP fell 0.3%. The Fed's expectations that the Federal Reserve will be more aggressive than previously anticipated in raising rates and tightening policy have resulted in a jump in Treasury yields tied to surging inflation pressures in early 2022, which has been blamed for the weakness in U.S. stocks in early 2022.

The VanEck Russia exchange-traded fund RSX has fallen more than a quarter from a nine-year high set in late October, and is down 6.6% so far in January. The Russian ruble USDRUB is down more than 9% against the U.S. dollar over roughly the same stretch.

Barron s: As Russia-Ukraine tensions heat up, Russian stock prices may be too cheap to resist.

Analysts say that investors haven't fully priced in what an invasion would mean for commodities, including natural gas NG 00, wheat W 00, and corn C 00, according to MarketWatch spokesman Myra Saefong.

Europe relies heavily on Russian gas transit through Ukraine, and in 2022 has started with record-low European gas stocks. An invasion would likely scuttle approval of operations for the recently completed Nord Stream 2 pipeline, which is set to bring more natural gas directly to Germany, bypassing Ukraine.

West Texas Intermediate crude CL 00, the US benchmark, has been up more than 11% since the calendar flipped, while global benchmark Brent crude BRN 00 has advanced more than 10% since the calendar flipped. Both are trading close to the multiyear highs set in November.

Read: Oil rallies as analyst warns that Ukraine crisis could be a seismic event for the energy market.

The scramble for additional barrels will likely become an increasingly urgent priority, according to analysts at RBC Capital Markets, as oil prices are firmly in the White House political red zone and a Russian invasion of Ukraine is a front and center concern.