Investors tried to gauge the possibility of a wider conflict in the region by assessing the risks associated with escalating tensions between Russia, Ukraine and Wall Street on Tuesday.
The S&P 500 and the Nasdaq composite were both down about 0.7 percent in afternoon trading, as several countries announced economic responses after Russia’s president, Vladimir V. Putin, ordered troops into two breakaway regions in eastern Ukraine. The S&P 500 plunged nearly 1.9 percentage in the morning.
The measures against Russia included Germany’s decision to halt certification of the Nord Stream 2 natural gas pipeline, which would create a new link between the country with Russia, and Britain’s decision to impose sanctions on five Russian banks and three individuals.
President Biden also announced a “first tranche” of sanctions, against two of Russia’s largest financial institutions and Russia’s sale of government debt in international markets.
“That means we’ve cut off Russia’s government from Western finance,” he said. “It can no longer raise money from the West.”
Some indicators that investors were optimistic about the potential resolution of the conflict and its economic ramifications were evident in Tuesday’s trading. After an initial slump, stocks in Europe rebounded and ended slightly higher. The S&P 500 recovered from its lowest point of the day following Mr. Biden’s speech. The MOEX, Russia’s benchmark stock index, gained about 1.6 percent, reversing a decline of more than 9 percent.
Oil prices settled somewhat, too. Brent crude oil, the international benchmark for oil prices, had risen to almost $100 per barrel and was now trading at $97 per barrel, an increase of more than 1 percent.
It might have calmed nerves that Russia’s measures, and the response to them, fell far short of the full-scale invasion that some have worried about, said Caroline Simmons, the U.K. chief investment officer at UBS Global Wealth Management.
“I suspect it’s a sort of hope that this move has been made, some sanctions will be applied, but obviously not the full scale of sanctions,” she said. “But if it continues to escalate, then obviously that would be very bad for the markets,” she added.
A war between Russia, Ukraine, and other countries is likely to disrupt global supply chains for commodities. This will cause food and energy costs to rise and increase the risk of higher inflation. Russia is the world’s largest supplier of wheat and provides nearly 40 percent of Europe’s natural gas and 25 percent of its oil. An extended conflict could worsen Europe’s already high energy bills.
Americans may also find it difficult to manage the high oil and gas prices on global markets. According to AAA, gas prices in the United States have risen sharply to an average $3.53 per gallon.
As households spend more of their monthly budgets on energy, higher fuel prices could affect consumer spending on other goods. It could lead to a drop in demand as anxious shoppers cut back if there is a risk of war or uncertainty about the future.
“The Federal Reserve pays very close attention to geopolitical events, and this one of course in particular as it’s the most prominent at this point,” Michelle Bowman, a Fed governor, said on Monday.
Ms. Bowman noted that the U.S. had minor banking, financial and trade interests with Russia, and that “we don’t believe that would have a significant impact” on the economy given the small size of those relationships.
“But we do recognize that there are significant opportunities for potential impacts on the energy markets, as we’re moving forward, if things were to deteriorate,” Ms. Bowman said. “Obviously we’ll continue to watch that, and if we believe that might have some influence on the global economy, we’ll take that into account as we’re going into our meetings and discussing the economy more broadly.”
The potential economic consequences of the conflict in Ukraine have led traders to seek out the safety of Treasurys. This has lowered yields on U.S.-based bonds. Investors have another concern: how much and how quickly will the Fed raise interest rates, which are currently near zero, to address inflation. Higher interest rates could slow down the economy by reducing spending and encouraging investment.
The yields on the 10-year Treasury Note rose to 2.1% last week as traders prepared for rate rises. On Tuesday, the yield was hovering around 1.93 percent. The yield of bonds falls as they rise in value.
Rate increases that could begin as early as March have the potential to increase…