War And Inflation Put Bull Market In Hibernation

To say Russia’s invasion of Ukraine has changed the outlook for financial markets is a vast understatement. Russia President Vladimir Putin’s aggressive attempt to erase Ukraine as a sovereign entity could have major implications for the global world order. While we all hope for a peaceful resolution to this humanitarian and geopolitical crisis, we must also consider the potential for less desirable consequences.

For financial markets, investors may be underestimating the immense range of potential outcomes for this conflict. It is extremely difficult to “price in” such a diverse set of scenarios. In fact, the current level of uncertainty is reminiscent of two years ago, with the arrival of the Covid-19 pandemic. As we said in March 2020, the world won’t be going back to the way it was just a few weeks ago.

An “economic world war”

The military conflict is currently contained to two countries, but for global markets, we could be entering an “economic world war.” One unique aspect of this Russia-Ukraine War is the widespread corporate self-sanctioning. We’re seeing so many multinational companies with world-renowned brands suspending operations in Russia. This is inflicting economic pain on Russian citizens, who have been consuming increasingly more foreign products and services since the collapse of the Soviet Union in the early 1990s.

Sanctions were quickly implemented on almost everything except essentials like oil, gas, and food. Russia is resource rich but manufacturing poor, exporting natural resources and importing goods. Russian-produced commodity prices are soaring. This includes everything from energy (oil, natural gas, coal) to food (wheat, corn, fertilizers) to metals (nickel, palladium). The world relies on this supply of commodities. Moreover, shipping challenges abound. Ports are blocked and vessels are lined up in record numbers, making an already fouled logistic situation worse.

Implications for a new world order

China appears to be making a move to fill some of the trade vacuum with Russia. China may be content to buy Russian resources at a global discount and sell Chinese goods back to Russia. If this comes to pass, China will be viewed as a clear rival, if not an enemy, of the West. Yet China will remain a necessary U.S. trading partner — an uncomfortable scenario.