Markets have already reacted to the threat of a Russian invasion of Ukraine in a textbook manner akin to prior similar events that we have outlined in prior articles on January 31 and February 22. Today they are further reacting to the potential for spillover effects as financial conditions tighten and inflation pressures increase. Markets are also reacting to signs of more troops being deployed to NATO member states that border Russia and may expect a powerful U.S. sanctions response and subsequent Russian retaliation. Here are our latest thoughts.
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A wider war involving NATO or the U.S. is highly unlikely, with all major powers making it clear this isn’t in the cards.
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Cyberattacks are more likely than a nuclear response by Russia. Russian President Vladimir Putin warned against foreign interference in Ukraine, with some implying he means nuclear weapons could be used given the phrase “never seen in history” when referring to Russia’s response. However, it is far more likely he is referring to some sort of asymmetric response such as cyberattacks. This isn’t really a new risk; Russia has been at the forefront of cyberattacks in the U.S. and Europe for some time. His comment may also imply cutting off energy and gas supplies to Europe.
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Russia invading Ukraine does not equate to China invading Taiwan. Outside of the oil and energy impact, Russia and Ukraine are relatively small countries from an economic perspective. Notwithstanding, this conflict has a very different economic impact than a potential Chinese invasion of Taiwan, the latter involving large economies critical in a wide variety of global supply chains. Today there were headlines that eight Chinese planes entered Taiwan airspace, with some suggestion that this was China taking advantage of a distracted NATO—however, these overflights happen every day, according to Taiwan’s Ministry of Defense, which tracks these events.
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The global and European economies were reporting a much better-than-expected rebound from the COVID-19 omicron variant, both in terms of February purchasing managers indexes and other economic data this year. Investors should not become single-mindedly focused on the conflict in Ukraine and take their eyes off other economic indicators. This conflict may contribute to existing inflationary pressure, but the potential drag to growth comes at a time when momentum was rebounding.
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Takeaway: Investors should seek to avoid getting caught up in dramatic events as they unfold. It rarely leads to wise decisions.
Michelle Gibley, CFA®, Director of International Research, and Heather O’Leary, Senior Global Investment Research Analyst, contributed to this report.
© Charles Schwab
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