Russia’s intensifying invasion of Ukraine has sent investors rushing for cover. And the moves suggest volatility is here to stay.
The Cboe Volatility Index — the “fear gauge” for the S&P 500 — jumped to the highest on a closing basis since January 2021, while Wall Street strategists recommended loading up on so-called defensive stocks such as utilities that aren’t directly tied to how the economy is doing.
Europe’s worst conflict since World War II has sent investors rushing for cover in havens such as the dollar, gold and U.S. Treasuries. While Ukrainian and Russian officials are set to begin talks Monday, traders are cautious about dipping their toes into stocks given the escalating risks. The U.S. and Europe have kicked some Russian banks out of the critical SWIFT financial messaging system and that’s sent the ruble to fresh all-time lows, prompting the Bank of Russia to raise its key interest rate to the
But the implications extend far beyond Russia: Rising oil prices are adding to inflation pressures, increased defense spending hurts economies just coming out of COVID-19 and the Federal Reserve’s plan for faster interest rate increases to tame inflation could be affected.
“We expect a period of high volatility and higher equity risk premia,” said Patrick Moonen, principal multi-asset strategist at NN Investment Partners. The firm cut its exposure to cyclical stocks as commodity price-driven sustained high inflation could weigh on the growth outlook, he said.
Strong defense
From utilities to telecommunications, defensive stock sectors have outperformed this year along with the dollar index, signaling mounting worries that the Russia-Ukraine war will curb economic growth. Generali Investments is cutting its overweight position on value while adding defensive and quality names. Morgan Stanley analysts upgraded utilities to overweight and downgraded automotives to equal-weight.
Plunge, surge, plunge again?
Future contracts tracking the S&P 500 slumped as much as 2.9% before paring the advance to trade 1% lower in the wake of the benchmark index’s hefty gains on Friday. If the selloff gathers pace, it could dip back into correction levels, defined as 10% drop from its recent peak.
Gold rush
Spot gold prices have soared in February as investors sought safer investments. Bullion is just shy of hitting the highest level since December 2020.
Russian collapse
The Russian central bank suspended stock trading in Moscow for the day, but traders are selling whatever they can. The VanEck Russia ETF, a U.S.-listed fund that tracks the country’s stocks, lost more than a quarter of its value Monday in U.S. premarket trading.
The BP pulse
BP shares plunged as much as 7.5% Monday, the most in three months, after the oil company decided to get rid of its stake in Rosneft PJSC at a time when analysts see little chance of it attracting a buyer. The British company warned it could take a writedown of as much as $25 billion from exiting Russia.
Among stocks with heavy Russian business exposure, tiremaker Nokian Renkaat Oyj lost almost a quarter of its value and Austria’s Raiffeisen Bank International AG declined as much as 19%.
“The Russian invasion of Ukraine fits into the unknown unknown box, along with most geopolitics,” said Michael Wilson, a strategist at Morgan Stanley. “While there are many people who know quite a bit about such matters, geopolitics are very difficult to analyze and therefore very difficult to price. Instead, this invasion simply adds another risk to the mix that’s unlikely to disappear quickly.”
— With assistance from Michael Msika and Sagarika Jaisinghani.
