The rapidly unfolding geopolitical and humanitarian crisis in Ukraine rippled through Wall Street on Monday as investors tried to calculate the impact of coordinated worldwide efforts to isolate Russia’s economy and rob the Kremlin of means to fund its unchecked invasion.
“The volatility continues to be the main investor narrative,” said Greg Bassuk, the CEO of AXS Investments. Bassuk said the coronavirus pandemic and impending interest rate hikes were already weighing on market sentiment. “Adding the Russia uncertainty has really rattled the markets, for sure,” he said.
The three major indices were all trending down Monday afternoon, although the tech-heavy Nasdaq spent much of the morning in positive territory, ending the day 0.4 percent higher than its Friday close. Along with tech, and cybersecurity in particular, renewable energy, defense, cybersecurity and other industries got boosts, while banks and airlines struggled, showing that even when it faces a threat the likes of which the West has not seen since World War II, the market has a way of sussing out winners and losers.
Germany’s surprise announcement over the weekend that it plans to pour 100 billion euros into national security and military spending gave a quick jolt to U.S. defense-sector companies such as Raytheon and Lockheed Martin. Within the tech industry, security companies jumped on the expectation that cyberattacks will emerge as a more potent weapon in future conflicts.
“I would think that so many more companies are reaching out to some of these cybersecurity firms to get some help [from] the threats of cyberattacks,” said Melissa Brown, the managing director of applied research at Qontigo. While weaponizing the work of hackers is not new, “I think now you’ve got a much more imminent threat,” she said.
The broad tech sector has slumped in recent weeks on the expectation that the Federal Reserve will hike interest rates, which would raise corporate borrowing costs. Analysts interpreted the reversal as an expectation that economic fallout from Russia’s aggression could moderate the Fed’s tightening trajectory.
Expectations about the Fed’s next move and how the current conflict might change that calculus cut the other way for the financial services sector. Banks earn higher margins when the discrepancy between short- and long-term lending rates — known as the spread — is greater. “If the Fed doesn’t raise rates at the next meeting, that could hurt financials,” Brown said.
Banks also perform better when the economy is healthy in general, and analysts say the prospect of an inflation-triggered slowdown is another headwind.
“I think the conviction that we felt a couple weeks ago is a little softer, given the last few days,” said Chris Marinac, the director of research at Janney Montgomery Scott. “Everything has completely gone in a tailspin from the standpoint of the certainty for credit quality.”
Unlike their European counterparts, most big U.S. banks do not have significant direct exposure to Russia. One exception is Citigroup, which warned in a securities filing that it had about $1 billion in net investments in Russia and third-party exposure of more than $8 billion.
The unprecedented step of barring major Russian banks from using the international SWIFT payment messaging network could have as-yet-unforeseen consequences even for financial institutions without direct investments in Russia, said Jay Hatfield, the founder and CEO at Infrastructure Capital Management. “Financials are the sector affected most because there is a fear [of] contagion,” he said.
Like interest rates, higher oil prices also are a boon for some companies and a bane for others, with renewable energy and electric vehicle producers emerging as early winners.
“Either you have this continuing conflict and energy prices stay high or go higher, or it abates and you have a reasonably strong economy, which is also going to keep energy prices up,” Brown said. “Either way, I think that’s the bet that’s being made.”
High energy prices are a major headwind for airlines and other types of transportation companies, however. “Airlines, we think in the immediate term, are another cautionary sector,” Bassuk said.
In addition to driving up inflation because of higher transportation costs for companies and gas prices for consumers, analysts warned, higher energy prices are likely to push up prices of agricultural commodities, because natural gas is used in the production of nitrogen fertilizer. “Those are things we’re starting to watch and [where we] could see more of a ripple effect type of thing,” said Peter McNally, the global sector lead for industrials, materials and energy at Third Bridge.
For an economy already grappling with inflation at 40-year highs, that is another bit of unwelcome news that analysts say will weigh on the market. Bassuk said, “We’re seeing oil and commodity prices spike, which is driving even greater concern about inflation.”