From 1941 to 2020: How stocks reacted to 18 major geopolitical risks since Pearl Harbor
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With its strong resources weighting, multiple ASX sectors have been centre-stage for the dislocation in commodity markets stemming from the violence in Eastern Europe.
As James Whelan wrote on Stockhead earlier this week: Palladium, wow. Wheat, wow. Oil, wow.
But as Josh Chiat pointed out yesterday, the parabolic moves in commodities are also having some unintended consequences (ASX nickel stocks actually fell yesterday, before the market literally broke overnight).
While those macro commodity moves have prompted some sector rotations, the outlook stemming from the conflict is impossible to predict.
So far, the broader ASX 200 has lost around 3% since news of the invasion broke on February 24.
The conflict is approaching its third week, and it’s prompted some difficult questions for investors about the interconnectedness of global markets, given Russia’s role as a major energy producer.
But recent research from Barclay Pearce Capital provides some historical context around how markets typically react to geo-political crises.
Going all the way back to Japan’s attack on Pearl Harbor in 1941, the average decline for the S&P500 across 18 major events is 5.4%:
Excluding two key risk events that took place during recessions, the average decline drops to 4.3%.
From that perspective, past shocks “don’t seem to affect markets” extensively in the short term, BPC equities traders Malcolm Kazal said.
In addition, the average time it takes for markets to bottom out is 15 days — precisely the amount of time elapsed in the current conflict.
The longest trip to the nadir was 50 days, following the US military intervention in Kuwait in 1990.
Like this crisis, it fostered a direct threat to global oil supplies which saw prices climb from US$21/barrel to US$46/barrel in the wake of Iraq’s invasion.
Kazal said the other key takeaway is that the biggest drawdowns in the S&P500 all took place when the US was drawn directly into a war.
And while it’s leading the coordinated effort to sanction Russia for its actions, the Biden administration has so far “ruled out sending troops to Ukraine, with military funding aid being proposed”, Kazal said.
“All else being equal, the market should recover sooner than later after the initial shock,” he added.
That said, investors are also navigating the extreme price pressures caused by rising commodity prices in an environment where inflation was already rising.
Early indicators are that the Fed may slow its rate hike plans, but it won’t halt them completely.
Already the US central bank has flagged its first rate hike for this month, and markets will get the latest update on US inflation this Thursday night (Australian time) when the February print is released.
In that complex environment, conflict risk has prompted the Dow Jones to move into correction territory — defined as a fall of 10% or more — from its January 4 highs.
For now, all eyes are on eastern Europe and whether that volatility will give rise to new medium-term dynamics in global markets.
“The duration of this war is unknown at this stage, as a surprising resistance is being mounted by Ukraine,” Barclay Pearce Capital said.
“The intensity of the battle across the country will be essential as the destruction of a country Russia wants to control would not make sense.”
In that context, “Australia could be uniquely positioned to capitalise on any world shortages through stepping up supply and deliveries on the large list of commodities at play here”.