Gill Capital Partners Update: Implications of the Russian Invasion of Ukraine on Capital Markets
There is a lot going on in global capital markets following the Russian attack on Ukraine this morning. There was a tremendous amount of volatility today, but the following is a summary of how various markets closed out the trading day:
The S&P 500 closed up 1.50%, the Down Jones Industrial closed up 0.28%, the NASDAQ closed up 3.34%, and the Russell 2000 closed up 2.64%. All of these indices started the day in negative territory, with the Dow opening nearly 2.50% below yesterday’s close.
European stocks were down 4%-5% when European markets closed this morning
Russian stocks fell roughly 40%
The Russian Ruble sank to a record low
Oil prices surged to $100/barrel before retreating, sitting at just over $93/barrel as of this writing
European natural gas prices rose from $29 per MM btu to $39 per MM btu (compared to $4.8 in the U.S.)
Corn and wheat prices surged
Bitcoin is down 5%
U.S. 10-Year Treasury yield dropped back to 1.85%
Markets will likely be volatile in the coming days and weeks, but what we saw today is generally in line with what one might expect under the circumstances. The purpose of this update is not to predict the path of geo-political outcomes, but to articulate our views on the potential impact of the crisis on the global macroeconomic backdrop and global capital markets. Before this crisis, the market was focused on inflation and concerns about Federal Reserve tightening. While these concerns persist, this crisis may create other effects that could complicate, mitigate or, in some cases, potentially even aggravate some of these issues.
Global Macro-Economic Impacts & Federal Reserve Positioning
From a macro-economic perspective, this crisis will create certain supply shocks, primarily related to energy prices in Europe. European countries will pay a hefty near-term price for their heavy reliance on Russian gas. Over the last five years, Russia has supplied about 40% of European natural gas. Inflation has already been an issue as the global economy reemerges from COVID-related shutdowns. Existing inflationary pressures, along with additional potential effects resulting from forthcoming sanctions, are likely to exacerbate current high inflation in the near term, particularly in Europe. We believe it is likely that various governments will consider measures to alleviate the impact of inflation on their citizens. From a monetary policy perspective, this is likely to drive a softer approach from the Federal Reserve than what markets have been pricing in over the past few weeks. We have already seen interest rates drop today and may see them drop further as markets price in the potential for a softer tone by the Federal Reserve on the back of this crisis.
Impact on Equities and Bonds
Stocks pulled back initially but have since rallied back and ended the trading day in positive territory. Bargain hunters are snapping up stocks that are suddenly much more attractive given the expectation of less aggressive interest rate increases than anticipated just a few days ago. We are likely to see a sudden and almost cliché rotation into defense and energy stocks, and companies who have direct supply chain exposure to this crisis could see immediate revaluations. For fixed income markets, fear is driving a “risk off” flight-to-safety environment, driving yields lower, which is good for bonds that have seen a terrible start to the year. The upward rate normalization that was well under way prior to this crisis will now likely be on pause.
Summary & Things to Watch
We are paying close attention to a number of key macro variables and inputs as this crisis plays out:
$100 oil - A sustained price spike above $100/barrel will spell trouble for consumers, markets and the economy. We are likely to see further releases from the Strategic Oil Reserve and would not be surprised to see direct payments in many countries to help defer energy costs.
Treasury Yield Curve – The shape of the yield curve will help inform investors’ views on growth, with an inverted curve (long-term rates dropping below short-term rates) signaling a slowing growth environment or potentially even a recessionary environment. We are not concerned about the risk of recession given the strength of the fundamental economy and macro backdrop, but we also recognize that uncertainty has risen considerably, as have the range of potential outcomes.
Central Bank Communications – We will be monitoring Federal Reserve communications closely, particularly watching for signs that major central banks are toning down their aggressive positioning.
Sanctions – Many sanctions have been announced and we suspect many more will be forthcoming. We will be monitoring the potential knock-on effects of these sanctions along with any retaliatory escalation in sanctions.
As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.