Ukraine-Russia tensions adds additional market risk – The Average Joe

    Ukraine-Russia tensions adds additional market risk

    Victor Lei — Head of Research

    January 26, 2022


    January 26, 2022

    What’s a potential war on top of the already fragile market? While investors were distracted by the rising rates, another market risk has been developing…

    In the past few months, an estimated 100,000 Russian troops have gathered by the Russian-Ukraine border, prompting fears of a possible invasion of Ukraine — once a valuable and strategic region of the former Soviet Union.

    They’re not there for fun…

    Russia has reportedly denied invasion plans — but Putin isn’t backing down…

    • Meetings have been held between the US, NATO officials and Russia to relieve tensions — with no success.
    • The US, UK and European Union (EU) have threatened Russia with sanctions.

    Ukraine isn’t part of the North Atlantic Treaty Organization (NATO) — a military alliance between 30 countries — which poses the question: How far will the US and EU go to defend Ukraine?

    To avoid provoking Russia, President Biden restrained from interfering — but the recent escalations have forced him to change stances. Now he’s considering deploying several thousand troops (via NYT) — and last weekend, recommended all US citizens to leave the country.

    Everything leads back to inflation

    Russia is the EU’s fifth-largest trading partner — while barely among the top 30 for the US. Thus, any action would impact the EU more than the US.

    Military conflict would mean more trouble for the unstable global markets — here’s how:

    • Oil and natural gas prices could spike — as Europe relies on Russia for 35% of its natural gas.
    • Global assets would likely sell off even further — pushing investors to safer investments.

    Rising oil prices could lead to higher global inflation — which the markets are already up in arms over. Another alarm could send it into a panic.

    Investors: Negative consequences

    Brent crude oil prices are trading just above $86 a barrel — having risen nearly 60% in the past year — making the energy sector 2022’s top-performing sector so far. But the gains of one sector could mean pain for the global economy. As per JPMorgan economists (via Bloomberg):

    • Oil prices rising to $150 would have serious negative consequences on the economy.
    • In this case, global inflation could double to 7.2% and significantly slow global growth.

    With such far-reaching consequences from the military conflict, global eyes are on Ukraine — with various nations’ military forces on standby.

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