Global Markets Shocked By Russia’s Military Assault-Related Signals

A typically dark day for Europe witnessed extraordinary shock across financial markets. This report sums up some of the signals that world economy received during the first hours of the assault. Dow Jones plunges as Russian assault against Ukraine roils global markets, oil prices soared to record highs after Russia took actual steps to invade Ukraine. World leaders react to Russia’s attack on Ukraine.

Investors are focusing on potential energy-related disruptions following the military offensive, which is expected to trigger sanctions on Russia that would disrupt the world economy. All three US indexes opening in correction territory as investors braced for further uncertainty and energy-related disruptions.

Most major Asian stock indexes fell about 3 percent, and markets in Europe dropped just as sharply in the early hours. For many indexes, it was the steepest decline since late last year, when the omicron variant of the coronavirus sparked fears of another dark phase in the pandemic.

US markets bowled at the open, with the three major indexes all falling into correction territory. Shortly after the opening bell, the Dow Jones industrial average was down nearly 750 points, or 2.25 percent. The S&P 500 had declined 2.3 percent. The tech-heavy Nasdaq fell 2.5 percent, into a bear market, defined as coming down 20 percent or more from a recent high.

Tech names are likely to see significant pain as the escalating tensions send investors running for safer assets. The prevalent risk-off environment that has been in effect so far in 2022 will now be significantly exacerbated. Damage will be hard for already battered tech investors to absorb.

Though the Russian incursion is just beginning, several signals Thursday, including strikes across Ukraine, suggest a wide-ranging military offensive that would trigger deep sanctions from the United States and European Union, hurting not just the Russian economy, but the whole global economy.

Consumers around the globe are already facing widespread price increases tied to raging inflation and troubled energy markets, and now pains are likely to grow more acute.

Russia is a dominant natural gas and oil exporter, particularly to Europe, and some of its supply transits via pipeline across Ukraine. The price of Brent crude, the global benchmark, shot up 7.9 percent to nearly $101.50 a barrel, the first time it has been in the triple digits since 2014, while US oil jumped 8.3 percent to $99.70.
The national average for a gallon of gasoline on Thursday was $3.54 according to AAA, up from $3.33 just a month ago. A year ago, when demand was still largely flattened by the pandemic, the national average was just $2.66.

Benchmark prices of aluminum, nickel, wheat and corn (other exports from Russia and Ukraine) also soared to multiyear highs.

Russia has warned that Americans will fully feel the consequences of sanctions President Biden announced earlier this week. Biden has acknowledged that the crisis could lead to higher gasoline prices, while US businesses have been warned to prepare for possible cyberattacks. Biden said that more “severe sanctions” will be announced Thursday in the wake of the invasion.

Markets hate uncertainty, and the attack is arriving at a moment when the global economy is already wrestling with pandemic-related challenges in the form of soaring inflation, chaotic supply chains and labor shortages.

Investor sentiment was already fragile because of rising inflation and the upwards direction of travel for interest rates, but confirmation of war and the associated alarming news headlines around the world are likely to see equity markets go through a difficult period for longer than people might have previously expected.

Investors fled to safer assets, sending the yield on the 10-Year US Treasury note sharply lower to 1.865 percent. Gold, a Russian export and an investor safe haven, soared nearly 3 percent to trade around $1965 per troy ounce.

For all the immediate financial reaction Thursday, no country absorbed greater losses than those in Russia, whose major stock market index nosedived some 45 percent in the early hours Thursday, hitting its lowest level since 2016. Trading was briefly suspended amid the free-fall. The ruble slumped to its weakest point in at least the past 10 years, giving Russians less spending power when they go abroad.

Oil prices have risen more than 40 percent since December, influenced in part by speculation that Putin might launch an attack as Russia amassed troops on three sides of Ukraine.

After Russia’s 2014 invasion of Crimea, Europe’s dependence on Russian energy held the bloc back from enforcing certain both-sides-suffer sanctions. But European leaders this time are likely to agree that a more severe response is necessary, and they are drawing up plans to wean themselves from dependence on Russian oil and gas.

That includes, most immediately, shelving the Nord Stream 2 gas pipeline between Germany and Russia. But any new energy strategy is certain to take years — and will come at a massive taxpayer expense.

An analysis last week from Barclays, the British bank, noted that Europe would struggle to “substitute large quantities of Russian oil and gas with alternative energy sources in other countries, especially in a short period of time.” The bank’s analysis said this could lead to rationing, higher prices, and ultimately cut into GDP growth.

Some of those concerns were evident in Thursday’s stock market, where Germany’s DAX index fell even more sharply than most, sliding 4.5 percent by midday. The index has lost more than 14 percent of its value since early January.

European Commission Ursula von der Leyen said the 27-nation bloc would convene later Thursday to discuss new sanctions. The measures, she said, would weaken Russia’s economic base and its “capacity to modernize” by freezing the country’s assets in the E.U. and stopping its access to the European financial market.