Russia’s invasion of Ukraine, in addition to having potential widespread implications for the global economy, is a humanitarian tragedy and our thoughts are with the people in Ukraine.
On Thursday, Russia commenced a full-scale invasion of neighboring Ukraine. Accordingly, Western countries, including the U.S., European Union, and the U.K announced several rounds of sanctions on Russia. Markets were volatile as investors weighed the sanctions’ potential impact on inflation, monetary policy, and economic growth. However, U.S. markets finished the week on an incredibly strong foot and finished 0.8% higher for the week. International stocks, which are more exposed to the ongoing conflict, fell for the week. International developed and emerging markets fell -2.5% and -4.9%, respectively. This is similar to what we saw when Russia annexed Crimea in 2014 with U.S. stocks holdings up better than European and Russian stocks.
Part of the reason U.S. stocks held up better is that the U.S. economy, while not immune, is more insulated from the current crisis than Europe, which relies on Russia for energy supplies. The U.S. is a major energy producer; whereas, disrupted energy supply from Russia would have a much larger effect on the European economy. Furthermore, Russia is a constituent in emerging market stock and bond indices.
The economic impact from the conflict depends, in part, on its duration, in addition to other factors such as the impact from sanctions. Additional sanctions have been discussed and the situation is fluid, making the ultimate impact from the sanctions difficult to ascertain. In the U.S., the biggest impact from the conflict is that it aggravates inflationary pressures due to disrupted supply chains in addition to Ukraine being a major exporter of key commodities. Ultimately, despite the conflict being a modest negative for U.S. growth, our view is that recession risk in the U.S. is still low.
A look back
- Global equities finished -0.6% lower for the week, with international developed and emerging markets equities slumping -2.5% and -4.9%, respectively. U.S. stocks gained 0.8% on the week, snapping a two-week decline.
- 10-year U.S. Treasury yields climbed four basis points to 1.96%.
- After sending troops into separatist-controlled regions in Ukraine, Russia launched a full-scale invasion. Western countries, including the U.S., Europe, and the U.K, responded with sanctions.
A look ahead
- Russia’s invasion of Ukraine and the response by the rest of the world will be watched closely for its potential impact on inflation, monetary policy, and global economic growth.
- Federal Reserve (Fed) Chair Powell will give his semiannual monetary policy testimony to Congress on Wednesday and Thursday.
- Economic releases: Wholesale Inventories, ISM & Markit Manufacturing & Services, Dallas Fed Manufacturing, Factory Orders, Durable Goods Orders, Nonfarm Payrolls, the Unemployment Rate.
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