Weekly Brief: It Might Not Take Much To Break The Global Market These Days

Weekly Brief: It Might Not Take Much To Break The Global Market These Days

almost 2 years ago3 mins

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Global markets are looking remarkably delicate after war broke out between Russia and Ukraine last week.

🕰 Recap

  • We started last week unsure about whether Russia would actually go all in and invade Ukraine
  • But when Russia decided on Monday to recognize the independence of two separatist Ukrainian regions, global markets got spooked
  • And on Thursday, it abandoned all pretense: Russia invaded its neighbor, and stocks, bonds, and commodities all went haywire

✍️ Connecting The Dots

There’s a couple of reasons the stock market stayed so calm even as tensions between Russia and Ukraine were slowly building. For one thing, an all-out war didn’t seem all that plausible as recently as a few days ago, with economists at investment manager abrdn giving it just a 10% likelihood. And for another, US company profits should, the thinking went, remain insulated if tensions escalated. After all, the S&P 500 has rarely suffered significant losses amid past geopolitical shocks, and even then only for a short period.

But Russia’s swift and decisive moves surprised everyone, and the vague possibility that energy prices could spiral out of control is quickly becoming a reality. There could be plenty of other consequences for markets going forward too – from higher food prices threatening the recoveries of developed economies to a lack of raw materials hobbling aerospace production.

Layer that uncertainty on top of today’s already record-high inflation and sky-high stock prices, and markets suddenly look very delicate indeed. So if things take a real left turn, they could react a lot more forcefully than they have in past geopolitical crises. That means now might not be the time to look for a winning trade: you might be wiser to play it safe and build the most robust portfolio you can.

🥡 Takeaways

1. Hedging geopolitical risk isn’t an easy feat.

There are always more possible outcomes from this invasion than experts can think of, and the odds aren’t in your favor if you want to bet on which one will materialize. And even if you back the right horse, markets don’t always react like you expect them to: just look at what happened on the day of the invasion, when prices nosedived before recovering sharply. So unless you’re a professional investor, you might not want to get too close to the action here.

2. Everything is interconnected in global markets.

We’ve already touched on the far-reaching consequences of the conflict in Russia, but here’s a perfect example: Russia is one of the world’s biggest producers of grain, and the risk of a supply disruption is pushing its price higher. That higher price means more money for farmers, which translates into a higher demand for fertilizer, which in turn means higher prices and higher profits for their producers. And that’s how the threat of sanctions has sent the share price of US fertilizer producer The Mosaic Company soaring.

🎯 Also On Our Radar

The performance of the ARK Innovation ETF (ARKK) has been so bad that the arguably overhyped fund is almost starting to look appealing. It’s down 60% from its all-time high, and its price could go a lot lower yet. So watch ARKK closely: there could be a point where the opportunity to buy into some of the most disruptive businesses is too good to miss.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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