One year of Ukraine war: Bulls brush off Russian belligerence with aplomb; Powell, not Putin, key overhang

As per LPL Research, the Dow Jones Industrial Average slipped by an average of only 2 percent during 16 major conflagrations, including the Gulf War, the Iraq War, and 9/11.

An analysis of 20 major geopolitical events dating all the way back to World War II shows that equities fully recouped their losses within an average of 47 trading days.

“Buy on the sound of cannons, sell on the sound of trumpets,” legendary financier Nathan Mayer Rothschild is reputed to have said. Wall Street has another variation of this pithy advice – sell the rumour, buy the news.

The Russia-Ukraine war has demonstrated these time-honoured maxims with unerring precision.

Tanks and Trades

World stocks had started to feel the heat since the second half of February 2022, when the Kremlin began amassing troops on the border with Ukraine in spite of finger-wagging by Washington and Brussels.

Early in the morning on February 24, 2022, Russian forces launched a “special military operation” aimed at “demilitarisation” and “denazification” of Ukraine, plunging Europe into its biggest crisis since World War II.

The Russian market plummeted a blood-curdling 33 percent that day, followed by Turkey, which tumbled 8.17 percent.

The Nifty emerged as the third-worst performer with a 4.78 percent decline – its biggest one-day drop since May 4, 2020.

However, with the initial panic out of the way, the markets immediately began their upward march. After slumping to 15,863 on March 7, 2022, the Nifty took only eight sessions to recapture the 17,000 closing mark – in lockstep with a robust rally overseas.

The Sensex and the Nifty went on to hit their lifetime highs in the latter half of the year as the war became a distant memory. The India VIX volatility index, which had shot up to 31.98 on the day of the Russian invasion, cooled off the very next session and has trended lower since then.

The US VIX expectedly was more volatile as investors nervously tracked Washington’s sanctions and EU-supported military mobilisation in Ukraine, but calm was restored after a few months.

For Dalal Street, the bigger concern was the sell-off by foreign institutional investors as the ratcheting up of geopolitical tensions triggered a massive outflow of capital from emerging markets.

Foreign investors had been on a selling spree since October 2021, which accelerated as the war progressed.

Pressured by the gush of dollar outflows, the rupee plunged to lifetime lows against the US dollar, necessitating intervention from the Reserve Bank of India, which deployed the country’s forex kitty to defend the local currency.

The rupee has pulled back from the 83-mark amid a pause in selling by FIIs, while domestic benchmarks have outperformed most global peers.

Markets vs Macros

As against the rapid recovery in the financial markets, the global economy scarcely had a moment of respite as it lurched from one crisis to another.

Global supply chains, which were still reeling from the Covid shock, were engulfed in another catastrophe as two major suppliers of agricultural produce, minerals and energy were locked in a protracted war.

The most immediate impact was on global energy prices as the EU commenced the painful process of weaning itself away from Russian oil and gas.

Elevated oil and gas rates seeped through the economic system as consumers had to contend with an across-the-board jump in prices, stoking an unprecedented cost-of-living hardship that reverberated from New York to Nanjing.

Europe narrowly dodged an energy crisis this winter as unusually high temperatures moderated demand for natural gas for heating homes, though countries had to scramble for alternative sources to keep their factories and electricity generation plants running.

The tight energy markets also had a knock-on effect on fertiliser prices, which soared to record highs in March. (Natural gas is a key input for producing fertiliser).

Global wheat prices, too, displayed a similar trend as Ukraine – one of the world’s biggest exporters of the crop – was unable to transport shipments from its sea ports.

India, meanwhile, had a mixed record in weathering these storms.

The country fared better on the energy front as it began snapping up Russian oil that was available at a discount due to Western sanctions on Moscow. From accounting for only 0.2 percent of India’s import basket before the start of the Ukraine conflict, Russia overtook traditional sellers Iraq and Saudi Arabia to become New Delhi’s top oil supplier.

Similarly, India imposed curbs on wheat exports to rein in domestic prices and ensure adequate supplies for the massive Pradhan Mantri Garib Kalyan Anna Yojana (PM-GKAY) to supply free foodgrains to the poor.

However, it could not remain completely isolated from the red-hot inflation scorching global economies, as evidenced by the sticky retail price rise.

Which brings us to a threat far more menacing than any brigade of the Russian armed forces.

Powell, not Putin

It’s worth noting that benchmark indices hit their 52-week lows not when Russia was raining missiles on Ukraine, but when Jerome Powell, chair of the board of governors of the Federal Reserve System, began lobbing 75-basis point rate hikes in his war against inflation.

Rolling out the sharpest tightening of monetary policy in more than four decades, Powell jacked up rates from around zero in the first quarter of 2022 to 4.50-4.75 percent currently in an effort to douse rising prices.

US retail inflation began retreating under the sledgehammer of the Fed’s interest rate increases, but is still way above its target range of 2 percent.

Powell has repeatedly stated that there’s a long way to go before policymakers can declare a decisive victory over inflation, which means more pain in store for the economy as well as asset prices.

Most analysts have priced in further rate hikes before a Fed pause, even as the threat of a hard landing looms.

“In the first half of 2023, we expect the S&P 500 to re-test the lows of 2022 as the Fed overtightens into weaker fundamentals. This sell-off combined with disinflation, rising unemployment and declining corporate sentiment should be enough for the Fed to start signalling a pivot,” Dubravko Lakos-Bujas, global head of equity macro research at JPMorgan, said in a recent note.

Warning that the final stages of a bear market tend to be the trickiest, Morgan Stanley advised investors to stay focussed on fundamentals and ignore the noise.

While most brokerages have flagged the Ukraine conflict as a key headwind for global food and energy security, it does not feature as a major concern for determining the stock market’s trajectory.

When Vladimir Putin began his military adventure in Ukraine, the main point of debate among geopolitical analysts was whether Kyiv would capitulate in three days or four. With the Russian war machine suffering humongous losses and no end in sight to the conflict, experts are now anxiously evaluating Putin’s next course of action, including the hitherto unthinkable scenario of a nuclear strike.

Displaying a remarkable devotion to his profession, one Canadian fund manager had urged his clients last year to continue buying stocks despite the “risk of Armageddon” because their investment decisions will anyways be rendered irrelevant if there is an all-out nuclear war, so what’s there to lose?

But if history is anything to go by, it is Powell, not Putin, who will decide the fate of the market faithful.