What does a Russian invasion of Ukraine mean for the markets?

The escalation of tension for Ukraine continued to shake the markets on Tuesday morning.

Russian President Vladimir Putin has recognized the independence of the breakaway regions of eastern Ukraine and ordered the military to move to separatist territories, a move that could lead to further sanctions against Moscow and inspire concerns that a country could immediately enter.

“Western leaders will see this as crossing the red line, bringing it closer to where sanctions will start. If that happens, sanctions will be tough, sending energy prices soaring and stock markets lower,” he said. chief economist at Pantheon Macroeconomics.

The White House issued a statement boycotting these areas, while additional measures are expected to be announced, most likely sanctions.

The sanctions will be separate from those prepared by the US government in the event of a Russian invasion, the Associated Press reported, citing sources.

The US stock market closed lower on Friday for the second consecutive week, while bond yields fell as investors looked for assets considered safer in times of geopolitical uncertainty, while the desire for security increased gold prices.

Oil last week failed to gain momentum from tensions in Ukraine, although fears of an invasion have pushed prices to no less than $ 100 a barrel.

By contrast, the prospect of a revitalized nuclear deal with Iran, which could eventually lift US sanctions on the country’s crude exports, led to profit as crude contracts ended a series of eight-week gains.

So what if the situation in Ukraine continues to escalate?

For investors, the focus will be on energy prices with analysts warning that crude oil is likely to jump above $ 100 a barrel.

“Biden remains adamant that Ukraine will be defended and that sanctions, such as blocking energy sales, will be applied as resistance to Russian military action.

“With oil prices already at multi-year highs due to supply problems, further intensification could mean a larger increase (above $ 100) that could negatively affect both the US and the global economy,” said Larry Adam, chief executive. for Raymond James.

Beyond crude, Russia’s role as a major supplier of gas to Western Europe could push prices up in the region.

Overall, a sharp rise in energy prices in Europe and around the world would be the most likely way for a Russian invasion to spark financial market instability, analysts say.

Not everyone is convinced that significant supply disruptions would be inevitable.

“We suspect that neither the West nor Russia is in the mood to cut trade in energy, and that prices could fall very soon,” said analysts at Capital Economics.

“On the contrary, the West has imposed sanctions on Russian metal producers in the past, with most of Russia’s iron exports leaving the Black Sea ports, and the risk of supply disruption is high,” they said.

Indeed, analysts had warned that iron prices, in particular, could rise further in the event of an invasion.

Both Russia and Ukraine are major exporters of grain, which rose 2.3% after rising to almost a month high.

For the most part, stock analysts continue to underestimate the possibility of a conflict in Ukraine having more than a temporary impact on US stock markets.

Despite the short-term volatility in the aftermath of geopolitical developments over the past three decades, from terrorist attacks to the outbreak of war, stocks tend to recover relatively quickly, recording an average of 4.6% in the six months following such crises dating back to 1990 and increase 81%.

“In general, Fed policy and economic conditions tend to be the most long-term drivers of the economy and financial markets, rather than individual geopolitical events,” analysts said.

However, the economic and market consequences of an invasion “may pose a short-term downward risk to the global economy and cause persistent market instability.”