By Ben Norris, CFA, Securities Research Analyst, Associate Vice President
Since Russia moved to invade Ukraine on Feb. 24, reports have emerged that Russian president Vladimir Putin and Russian military leadership expected to take full control of the country within days. Their expectations seem to be very misguided after nearly two weeks of fighting. The Ukrainian military, the country’s citizens, and its allies have mounted a fierce resistance effort that has so far slowed the Russian advance and has some strategists wondering if Russia may have miscalculated when deciding to invade. While Russia appears to be struggling militarily, many of the world’s powers have come together to punish Russia economically. The emerging consensus is that the effects of these sanctions will weigh on the Russian economy for years to come. Many major corporations have also decided to either pause their business operations in Russia or exit the country altogether.
Perhaps most notably, the U.S. and the European Union have eliminated Russia from SWIFT (Society for Worldwide Interbank Financial Telecommunication), a secure network that enables transactions between financial institutions. This move works to severely restrict the activity of Russian banks and is a major step in grinding Russia’s economy to a halt. Without access to the system, a bank’s customers have no way to complete international transactions – cross-border trade (imports, exports, loan payments, etc.) is made extraordinarily difficult. Major credit card networks also operate through SWIFT which will have knock-on effects for Russian consumers. Russia’s currency, the Ruble, has taken a serious beating as a result, trading for less than one penny relative to the U.S. dollar. A currency weakening to this extent has historically indicated declining faith in a country’s economic fundamentals and will substantially impact the purchasing power of average Russians.
Now many major economies, including the U.S., are considering a ban on Russian oil imports. This is significant — Russia is the third-largest exporter of oil behind the U.S. and Saudi Arabia and accounts for roughly 10% of global supply. This seems to be another miscalculation by Putin who likely assumed appetite for cheap Russian oil would outweigh any objections to Russian military aggression. While cutting off access to 10% of the world’s oil would be painful in the interim, the global economy has only gotten more flexible over the last two years and workarounds will likely come into action sooner than expected. This is also the appropriate time to note that Russia is not a global economic power – Russia only accounts for about 2% of global GDP and its economy is highly dependent on energy exports – which account for about half of the country’s federal budget. All of this is being done to put pressure on Putin (and Russian oligarchs) to end the invasion before irreparable damage is done to the Russian economy.
All these developments have created waves in global financial markets over the last few weeks. Stocks have been understandably volatile as investors attempt to parse out long-term effects of a potentially drawn-out conflict in Europe. Last week all major U.S. indices fell alongside global stocks. The S&P 500 (SPX) fell 1.24% while the NASDAQ composite finished 2.76% lower as stocks in the Technology and Communication Services sectors suffered outsized losses. The Russell 2000, a small-cap stock index, fell 1.92% on the week as there were few places to hide. Safe-haven sectors fared better than their more aggressive counterparts last week. The Utilities, Real Estate, and Health Care sectors gained 4.9%, 1.8%, and 1.2% respectively.
In contrast, stocks in the Financial sector were the worst performers last week down nearly 5% as Russian financial sanctions clouded the picture for global banks. Technology and Comm. Services each fell 3% on the week. Energy was the notable standout last week, gaining more than 9%. The price of Crude Oil has surged above $120/barrel on the news of potential Russian sanctions and non-Russian oil producers stand to see historic levels of profitability if these prices hold. Other defensive assets have performed well lately as well. The price of Gold has climbed to $2,000/ounce and U.S. Treasury yields moved lower last week and investors snapped up bonds with proceeds from their stock sales.
In domestic economic news, Federal Reserve Chairman Jerome Powell indicated last week that he would support a 0.25% rate hike at the Fed’s meeting on March 15-16. Prior to Russia’s invasion, markets were anticipating a 0.50% rate hike, but the uncertainty created by Russia’s actions has cleared the path for a more measured policy move. Adding pressure to the Fed’s next moves was last week’s impressive jobs report, which showed that the U.S. economy added 678,000 jobs in February. Similarly, jobless claims came in below consensus expectations. The unemployment rate fell to 3.8% and is trending toward the pre-pandemic low of 3.5%. The ISM Manufacturing and Non-Manufacturing indices both indicated continued expansion in February despite headwinds from supply chain issues and a tight labor market. Things are generally looking pretty good for the U.S. economy although we are closely watching a few things – high energy prices, rising interest rates, and an increasingly tight labor market — that when combined, can create economic headwinds.
Last week’s comments noted that wars tend to be accompanied by panic in markets, and this time around has been no different. While global markets have been rocky as of late, investors have historically had a short attention span and may move on to the next headline in the coming weeks. While I generally agree with this sentiment, I don’t want to discount the short-term impact this could have on certain sectors of the global economy that may experience painful bouts of volatility in the coming weeks. Most investors should stay the course and focus on the long-term as the global economy will certainly find a way forward – with or without Russia.
The upcoming week features an update on inflation in the Consumer Price Index (CPI), consumer sentiment, as well as a variety of employment figures.
| Date | Report | Previous | Consensus |
| Monday 3/7/2022 | Consumer Credit | $19B | $24B |
| Tuesday 3/8/2022 | NFIB Small Business Index | 97.1 | 97.4 |
| Wednesday 3/9/2022 | Job Openings | 10.9M | 11M |
| Job Quits | 4.3M | – | |
| Thursday 3/10/2022 | Initial Jobless Claims | 215,000 | 220,000 |
| Continuing Jobless Claims | 1.48M | – | |
| Consumer Price Index, February (y/y) | 7.5% | 7.8% | |
| Core Consumer Price Index, February (y/y) | 6.0% | 6.4% | |
| Federal Budget Deficit | -$311B | ||
| Friday 3/11/2022 | U. Michigan Consumer Sentiment Index | 62.8 | 62.3 |
| U. Michigan 5-year Inflation Expectations | 3.0% | – |
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.