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The Russia - Ukraine Situation: Markets React

Stephen Morgan
February 25, 2022

The Hancock Whitney Asset Management Team hosted a special call this morning to provide updates on the evolving situation in Ukraine and its market implications.

Key Insights from today's call:

  • After months of building up troops on the Ukrainian border, Russian President Vladimir Putin officially recognized the sovereignty of two breakaway regions in eastern Ukraine which Russian-allied separatists have largely held since 2014 (presumably with the support of much of the ethnically Russian majority population in the area). He then ordered Russian troops into the regions as “peacekeepers”. Soon thereafter, under the pretense of protecting ethnic Russians in those regions and beyond, he authorized full scale military action across Ukraine. Russian military forces deployed across the Ukrainian borders with Russia, Belarus, Crimea and the separatist regions, subjecting Ukraine to aerial strikes, shelling and ground forces. Attacks have continued since the initial moves. While reports from the combat zone can be spotty, it is fairly certain that Russian forces have entered the Ukrainian capital of Kyiv and are advancing toward the government enclave.

  • In response, Ukrainian refugees are fleeing the country, while Ukrainian President Volodymyr Zelensky has banned males between 18 and 60 from leaving the country in order to bolster its fighting force. He has also asked Ukrainian citizens to shelter in their homes and prepare Molotov cocktails to use against Russian troops.

  • The moves have drawn condemnation from Western leaders and their allies. An initial set of limited sanctions aimed primarily at financial institutions and certain members of the Russian elite followed the initial recognition of the breakaway regions, though notably German Chancellor Olaf Scholz suspended certification of the Nord Stream 2 pipeline which was to bring natural gas from Russia into Germany. Following the escalation of the hostilities in Europe, more significant sanctions were announced by the U.S., the European Union, Japan, the United Kingdom and others. Although in many cases, details are still to be announced, the moves are primarily targeted at access to international financial networks and on imports of technological goods along with further sanctions against members of the Russian elite. Notably, sanctions largely avoid targeting the Russian oil & gas industry which is a crucial source of energy supply to Europe. It also appears that, at least for now, Russia will retain access to the SWIFT network which is used for cross-border communication between banks in order to facilitate payment and settlement. The U.S. sanctions did, however, cut off access for large Russian banks to clearance through the U.S. Federal Reserve and other financial institutions, significantly restricting Russian ability to conduct business in dollars. While these moves should prove painful to Russia in the longer term, it is worth noting that the nation has built about $630 billion in cash reserves which should help cushion the blow for some time.

Russia and Ukraine and the market

 

  • Equity markets had mixed reactions globally. European markets were initially hit hard by the news of the invasion and closed their trading day with big declines from the day before. U.S. markets opened lower in line with the initial reaction in Europe but rallied throughout the trading day to close higher. Asian markets followed suit. At this point, European and U.S. markets have both rallied on the second day, confirming the intraday rally in the U.S. A similar move and reversal has affected domestic bond market but in the opposite direction. Bonds rallied on a ‘flight-to-quality’ trade, but have given that back two days in and yields are rising again. Investors, it appears, have convinced themselves that the event itself does not disturb the larger context surrounding expectations for the year. In fact, the initial negative price move provided a re-entry point for some of the large amounts of cash on the sidelines.

  • At this juncture, we believe the most likely outcome of the conflict is an overthrow of the existing Ukrainian government by Russian forces with a puppet regime installed in their place. It is, possible, however, the Putin could settle for annexation of the two separatist regions if he can gain sufficient further concessions from the West. We assign a low probability to further Russian military action beyond Ukrainian borders in the short term, though there are other areas that appear to be potential future targets, most notably the former Soviet Republic of Georgia.


See and hear today's special presentation in the video below:

HubSpot Video

 

 

Sources: Factset, Strategas Research Partners, Reuters, The Associated Press, Politico, The Hill, Foreign Affairs

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