“War: what is it good for? Absolutely nothing,” says Charles Schwab
The Russian invasion of Ukraine and the West’s retaliation with sanctions against Moscow have increased the risk of recessions in many countries, which were already reeling from higher inflation and declining economic growth just as the world began to look in the rear-view mirror of the pandemic. places, noted Charles Schwab, a large US-based asset manager.
Financial markets have been confused and remain volatile, unable to confidently price the implications of the news flow given the complex state of the global economy.
“The titles of these reports are always courtesy of well-known (and often more obscure) rock songs; but today some of the lyrics resonate emotionally from Edwin Starr’s song War,” wrote Chief Investment Strategist Liz Ann Sonders, with Kevin Gordon, Senior Investment Research Specialist, at Charles Schwab, in a report titled, “War: What’s It Good For? Absolutely Nothing.”
“It’s been two overwhelming years, with Russia invading Ukraine just as it looked like we were going to put the COVID-19 virus in the rearview mirror. The immediate impact of the war on the US and international economies is through the energy markets. , sanctions on Russian banking and payment systems have also led to significant volatility in foreign exchange markets. The significant flattening of the US yield curve and the plunging GDP forecast for the first quarter of this year already pointed to a mounting recession risk… a war, which clearly ups the ante,” they noted.
The price of a barrel of crude oil, which had already risen in January amid supply concerns and expectations of a strengthening global economic recovery, has skyrocketed since Russia invaded Ukraine on February 24. Oil is now about double its early December low .
At the risk of even higher fuel prices in the US that could curb economic growth, the US has banned oil imports from Russia, in addition to sweeping US and European sanctions imposed on Moscow for launching the main war in Europe. since World War II.
“While stock market stress continues to wade in and several sentiment metrics have turned sour, there is no shortage of experts and analysts arguing that stocks are poised for a contrarian move upwards. While it may indeed be true that pessimism has historically been consistent with stronger gains for equities, we would like to emphasize that it generally takes a positive catalyst to give a boost,” said Ms Sonders and Mr Gordon.
“Of course, this could come through a ceasefire and/or a rapid decline in energy prices, but betting on that in the short term seems like a fool’s errand. Market weakness is not a new Russia/Ukraine related phenomenon. Sharp observers know that breadth between traditional indices had deteriorated long before Russia invaded Ukraine. No matter how you slice it, the weakness is widespread and the violent churn below the surface has made its way to the index level this year,” they added.
In recent weeks, a wide range of other commodities, from metals such as palladium and gold to wheat, have also seen major moves.
Gold has extended its blistering rally to an all-time high. At the same time, concerns about a shortage of palladium stocks due to sanctions against Russia, the largest producer of the autocatalyst metal, kept the price close to an all-time high. Prices for Brent oil have risen more than 30 percent since the invasion began, while nickel prices doubled on Tuesday.
“The world is in turmoil; with energy and food prices rising, the dominant non-human victim. The Russian invasion of Ukraine took place at a time when inflation was already soaring, energy crises were already brewing and economic growth was already underway. was declining,” said the investment advisers at Charles Schwab.
“Given the limited additional energy and/or food supplies that can be brought in quickly, and the reluctance of monetary policymakers – read: the Fed to halt rate hikes – there is a clear possibility that the spike in energy and food prices will lead to recessions in several countries. In other words, energy crises are ‘solved’ through the destruction of demand created through recessions,” she added.
