Escalating tensions between Russia and Ukraine pushed stocks lower on Tuesday, adding to turmoil this year and leaving the S&P 500 more than 10 percent below its January peak.
A drop that large is known on Wall Street as a correction. It’s the kind of big, round number that crystallizes the view that the mood in markets has substantially shifted, and it doesn’t happen often — the last time was February 2020, when investors were in a panic over the emerging coronavirus pandemic.
The measures against Russia included Germany’s decision to halt certification of the Nord Stream 2 natural gas pipeline, which would create a new link between the country with Russia, and Britain’s decision to impose sanctions on five Russian banks and three individuals.
President Biden also announced a “first tranche” of sanctions, against two of Russia’s largest financial institutions and Russia’s sale of government debt in international markets.
“That means we’ve cut off Russia’s government from Western finance,” he said. “It can no longer raise money from the West.”
The trading on Tuesday included some indications that investors were hopeful that the conflict, and its economic ramifications, could be contained. Stocks in Europe recovered from an early swoon and ended slightly higher, and the S&P 500 rebounded off its lowest point of the day, when it was down nearly 1.9 percent, after Mr. Biden spoke. The MOEX, Russia’s benchmark stock index, gained about 1.6 percent, reversing a decline of more than 9 percent.
Oil prices also settled, somewhat. After climbing to nearly $100 a barrel, Brent crude, the international benchmark, settled at 96.84 a barrel, up 1.5 percent.
It might have calmed nerves that Russia’s measures, and the response to them, fell far short of the full-scale invasion that some have worried about, said Caroline Simmons, the U.K. chief investment officer at UBS Global Wealth Management.
“I suspect it’s a sort of hope that this move has been made, some sanctions will be applied, but obviously not the full scale of sanctions,” she said. “But if it continues to escalate, then obviously that would be very bad for the markets,” she added.
A war between Ukraine and Russia is likely to disrupt global supply chains of commodities, causing food and energy costs to rise and increasing the risk of a prolonged period of faster inflation. Russia is the world’s largest supplier of wheat and provides nearly 40 percent of Europe’s natural gas and 25 percent of its oil. An extended conflict could worsen Europe’s already high energy bills.
The high price of oil and gas on global markets could be a problem for Americans, too. Gas prices have risen sharply in the United States, averaging $3.53 a gallon according to AAA.
High fuel prices could weigh on consumer spending on other goods and services as families devote more of their monthly budgets to energy. If the potential for war makes consumers uncertain about the future or sends stock prices plummeting, it could weigh on demand as nervous shoppers retrench.
“The Federal Reserve pays very close attention to geopolitical events, and this one of course in particular as it’s the most prominent at this point,” Michelle Bowman, a Fed governor, said on Monday.
Ms. Bowman noted that the U.S. had minor banking, financial and trade interests with Russia, and that “we don’t believe that would have a significant impact” on the economy given the small size of those relationships.
“But we do recognize that there are significant opportunities for potential impacts on the energy markets, as we’re moving forward, if things were to deteriorate,” Ms. Bowman added. “Obviously we’ll continue to watch that, and if we believe that might have some influence on the global economy, we’ll take that into account as we’re going into our meetings and discussing the economy more broadly.”
The potential global economic ramifications of the conflict in Ukraine have encouraged traders to seek the safety of Treasurys, which has pulled down yields for the benchmark U.S. bonds. But investors have another concern on their minds: how far and how quickly the Fed will raise interest rates, which are near zero, to tackle inflation. Higher interest rates could slow the economy by discouraging spending and investment.
About a week ago, yields of the 10-year Treasury note passed 2 percent, their highest since mid-2019, as traders prepared for the rate increases. On Tuesday, the yield hovered around 1.93 percent. As bonds rise in price, their yield falls.
The potential for rate increases, which could start as soon as March, has made owning risky assets, like technology stocks, unattractive to investors. The tech-heavy Nasdaq composite is down more than 17 percent since its high in November.
Shares of Meta, Facebook’s parent company, have fallen about 40 percent since the start of the year, while Microsoft is down nearly 15 percent and Alphabet, Google’s parent company, nearly 11 percent.
Coral Murphy Marcos and Jeanna Smialek contributed reporting.
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