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Ukraine Situation Not Likely To Have Major Market Impact

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Russia’s “quiet” invasion of Ukraine this weekend is a major geopolitical development, and as such, is certainly having a negative impact on financial markets across the globe. That said, according to a Citi Research report released today, the situation is unlikely to have a lasting impact on global markets. Analysts Tobias M. Levkovich and colleagues explain their point of view: “Geopolitical risks are always a concern but direct impact is needed to undermine equities in a significant way.”

Ukraine: No return to “cold war”

The Citi report argues that a return to the cold war days is very unlikely. “There have been reports of Putin’s desire to build up Greater Russia again after moves in Georgia were not resisted on the international diplomatic scene and that he may see the latest land grab as more of the same. Furthermore, US disengagement from Iraq and Afghanistan is possibly envisioned by the Russians as a retreat of American influence, thereby opening up another chapter in Cold War mentality following the breakup of the Soviet Union. Yet, it is improbable that many former Soviet states are interested in kowtowing to Moscow and some reaction from western countries and NATO would be forthcoming under such circumstances; something one would expect to be considered by the Kremlin.”

Ukraine: International conflicts rarely hurt U.S. markets much

Levkovich et al. also argue that history shows that international conflicts rarely have a significant impact on U.S. markets over the long term. Typically a major international incident results in a quick one or two day decline, followed by a week or two to return to similar levels. The analysts elaborate on their argument. “The Iraq-Iran War, Kosovo and even the current Syrian civil war have had very marginal impact. The typical vehicle for the issue to become visible in markets is via heightened equity risk premiums restraining P/E ratios.”

Ukraine Panic model

Ukraine ERP

Economic developments move markets over the medium and long run

The report also emphasizes that it is economics that move the financial markets over the long run, not sensational headlines. “Since stock prices and earnings are highly linked, the crucial elements to watch have been hiring intentions, credit conditions, consumer confidence, durable goods orders, etc., versus watching sensationalist headlines about worldwide risks.”
Finally, Levkovich and colleagues suggest that even the obvious risk-related bull moves in gold and the dollar might not last long. “A sharply stronger dollar given risk aversion could generate some concern for globally exposed companies but even such a shift might prove very temporary. Similarly, some support for precious metals could emerge but it may not be lasting especially if attempts to ease tensions gain traction.”

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