"War: What is it Good For? Absolutely Nothing," Says A Large US Investment Firm

Russia's invasion of Ukraine and the West's retaliation with sanctions on Moscow has raised the risk of recessions in many countries, which were already reeling from higher inflation and waning economic growth, just when the world had started to put the pandemic in the rearview mirror, noted Charles Schwab, a large US based investment management firm.

Financial markets have been whiplashed and remain volatile, unable to confidently price implications from 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, a few of the lyrics resonate emotionally from the song War by Edwin Starr," wrote Liz Ann Sonders, Chief Investment Strategist,  with Kevin Gordon, a Senior Investment Research Specialist, at Charles Schwab, in a report titled: "War: What is it Good For? Absolutely Nothing."

"It's been an overwhelming two years, with Russia invading Ukraine just as it looked like we might be putting the COVID-19 virus in the rearview mirror. The immediate impact of the war on the US and international economies is via energy markets. Still, sanctions placed on Russian banking and payment systems have also led to significant volatility in currency markets. The significant flattening of the US yield curve and plunging GDP forecasts for this year's first quarter already pointed to rising recession risk…a war, clearly ups that ante," they noted.

The price of a barrel of crude, already on the march higher in January on supply worries and expectations of a strengthening global economic recovery, has rocketed upward since Russia launched its invasion of Ukraine on February 24. Oil is now roughly double its early December low.

Risking even higher US fuel prices that could curb economic growth, the US has banned oil imports from Russia, in addition to the sweeping US and European sanctions imposed on Moscow for launching the most significant war in Europe since World War Two.

"As stress has continued to wade into the stock market and several sentiment metrics have turned sour, there has been no shortage of pundits and analysts positing that equities may be poised for a contrarian move to the upside. While it may indeed be true that pessimism has historically been consistent with stronger gains for equities, we'd emphasize that a positive catalyst is typically needed to provide a lift," said Ms Sonders and Mr Gordon.

"Obviously, this could come via a cease-fire and/or quick retreat in energy prices, but betting on that in the near-term seems a fool's errand. Market weakness is not a new Russia/Ukraine-related phenomenon. Keen observers know that breadth among traditional indexes had been deteriorating well before Russia invaded Ukraine. No matter how you slice and dice it, weakness has been widespread, and the violent churn under the surface made its way to the index level this year," they added.

In recent weeks, a broad range of other commodities, from metals like palladium and gold to wheat, have also seen big moves.

Gold has extended its blistering rally towards an all-time high. At the same time, worries over a palladium supply shortfall due to sanctions on Russia, the top producer of the auto-catalyst metal, kept its price near all-time highs. Prices for Brent crude are up more than 30 per cent since the invasion began, while nickel prices doubled on Tuesday.

"The world is in turmoil; with spiking energy and food prices the dominant non-human casualty. Russia's invasion of Ukraine arrived during a period when inflation was already surging, energy crises were already brewing, and economic growth was already waning," said the investment advisors at Charles Schwab.
 
"Given the limited additional energy and/or food supplies that can be brought on quickly, and the reticence of monetary policymakers - read: the Fed, to stall rate hikes, a distinct possibility is that the spike in energy and food prices will lead to recessions in various countries. In other words, energy crises get 'solved' via the demand destruction that comes via recessions," they added.