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Ukraine war increases global inflationary pressures
Unlike previous wars, long-term bear market possible
High volatility inevitable Despite the Ukraine conflict, the US stock exchanges have held up relatively well over the past few days. Many market participants expect that the United States will be less affected by the direct consequences of the Ukraine conflict due to its geographical location. On the one hand, North America is less dependent than Europe on Russian resources, and on the other hand, American companies have less close ties with Russia overall. The dollar also gained significantly in strength against the euro. However, according to MarketWatch, analyst Marko Papic, chief analyst at Clocktower Group, warns American investors in particular against underestimating the economic consequences of the Ukraine war. He thinks global stagflation is possible.
Analysts expect inflation to increase
The high inflation rates worldwide and the associated fears of rapid interest rate increases were the main topic on the international stock exchanges in the past few months, before Russia’s illegal attack on Ukraine on February 24 overshadowed all other topics. Papic links these two developments: In his view, the Ukraine war is exacerbating already runaway inflation, which could trigger a bear market – as was the case in the 1970s. At that time, the Yom Kippur War of 1973 ushered in a protracted phase of inflation; it wasn’t until 1987 that the S&P 500 returned to its 1973 level. Analyst Derek Deutsch from ClearBridge Investments sees the main reason for a coming stock market downturn in a sharp increase in interest rates, which would end the times of high liquidity on the international financial markets – and even faster than previously priced into the markets.
Parallels to the 1973 oil crisis
Papic sees some parallels between today’s situation and the 1973 Yom Kippur War. The Organization of the Petroleum Exporting Countries (OPEC) cut oil production by 5 percent in October 1973 in order to pressure Western countries to provide military support to Israel . The result was an increase in the price of oil by 70 percent. The price of oil has also risen sharply in the last few days, as most traders refuse to buy Russian oil – the result is a shortage of oil. According to Papic, the resulting increase in energy prices for consumers and companies will, like in 1973, trigger further inflationary pressures on an already highly inflationary environment. According to Papic, the stagflation of the 1970s, i.e. the coincidence of inflation and stagnation, could be repeated in the coming years. In addition, according to Papic, there is a risk of a further escalation of the Ukraine conflict: “What happens, for example, if a Russian military aircraft enters Polish airspace and is shot down?”
“Buy when the cannons roar”? Market performance in wars
Most of the past military conflicts only had a short-term impact on international stock markets. Locally limited conflicts with minor consequences for the global economy, such as the Soviet invasion of Afghanistan in 1979, the second Gulf War in 1990 or the NATO intervention in Libya in 2012, only caused severe price falls for a short time, which were made up for within a few weeks. Altogether there have been no wars since 1945 – with the exception of the Yom Kippur War, which had devastating effects on the world economy primarily because of the lembargo – which triggered a bear market on the international stock exchanges. Historically, it has usually been worth buying “when the cannons are thundering”. According to Papic, however, this could be different with the Russian invasion of Ukraine.
Current impact significantly greater than 2014 Crimean invasion
The Russian invasion of the Crimean Peninsula in 2014 caused only a brief thunderstorm on western stock markets: for example, the S&P 500 fell by 2.08 percent on the day of the invasion (February 27, 2014), but the American index made the same loss recovered within a few weeks; the stock market year 2014 thus ended successfully despite the Russian invasion of Crimea. In contrast, Putin’s current attack on the entire Ukraine is much more extensive and has more serious consequences for the world economy, above all because of the far-reaching sanctions against Russia. In view of the heavy losses of the past few days, especially on the European stock exchanges, large parts of the consequences could be priced in, but given the changeable and confusing news situation, uncertainty is likely to remain extremely high. Editorial team finanzen.net Image sources: BEST-BACKGROUNDS / Shutterstock.com, bluecrayola / Shutterstock.com
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