Oil prices soar Test the resilience of US stocks

Western companies appear to be well insulated from the impact of sanctions imposed on Russia this week. Whether global markets are bullish remains unclear.

The main US stock indexes have been relatively resilient, with the S&P 500 and Nasdaq Composite both up at least 3.8% since Russia invaded Ukraine. Investors have so far remained calm in the face of the conflict and many have taken advantage of the opportunity presented by lower prices to buy. The data shows that the risk that US banks face is limited exposure to the region.

Good news, from a U.S. financial perspective: The average stock portfolio has almost no exposure to Russian stocks, and U.S. companies are barely dependent on Russian revenue. Meanwhile, Western banks’ exposure to Russia has decreased since the 2014 annexation of Crimea.

Uncertain and potentially disturbing news: Global energy markets may be more impacted by sanctions than traders, portfolio managers and investors policymakers realize. Oil has rallied strongly this week, largely reflecting a pullback by Western traders from a range of companies they fear could be linked to sanctions. Stocks and bond yields subsequently spiked as investors tried to determine the economic impact in the US. Both US equities and government bond yields rose on Wednesday after falling a day earlier.

To be sure, even the bad news in the New York markets fell short of what happened in Europe. This week, the Russian ruble has fallen, while London-listed shares of many Russian companies have fallen. Russia’s central bank closed stock trading Monday through Wednesday to prevent further turmoil. Even on Tuesday, when US stock indexes fell, investors said trading was orderly.

“I don’t think there are some types [market] Blake Gwinn, head of US rate strategy at RBC Capital Markets, said. “Things are working pretty much the way you’d expect them to.”

To be sure, potential risks to the US and other Western markets have emerged. Although still a smaller player on the world stage – Russia is the world’s 11th largest economy – its status as one of the largest suppliers of oil and natural gas has kept it under pressure. swept away with the rest of the world. Rising oil prices could exacerbate inflationary pressures in the US and elsewhere. Since the invasion, the price of Brent crude oil futures has risen 17% to $112.93 a barrel, the highest settlement price since June 2014.

Meanwhile, the risk that Russia will retaliate against Western sanctions by cutting off the supply of its products continues to exist. Any impact on Europe could still affect the US economy and cause pain ahead.

A powerful coalition of democracies announced it would cut several Russian banks from the Swift global payments system. Here’s how Swift works and how the move could put pressure on Russian President Putin. Photo: Anton Vaganov / Reuters

For now, however, strategists say, the growing disconnect between the Russian and Western economies is providing reassurance to investors that the portfolio can endure. with financial loss in the East.

“A diversified portfolio of equities and bonds would not have much exposure to Russia,” said Karin Anderson, research director of fixed income management at Morningstar..

“If you are a passive index fund investor or are more focused on actively managed funds, you are probably looking at an impression ratio of less than 1%.”

Take, for example, target-date funds in the US, a popular choice for investors in 401(k) retirement funds. Target-date funds, which offer a mix of stocks and bonds and grow progressively more conservative over time, have less exposure to Russian stocks and bonds, Morningstar data shows.

About 0.5% of assets in target-date funds were in Russian stocks and just 0.2% in Russian bonds as of the end of January, according to Jeffrey Ptak, director of ratings at Morningstar, according to Jeffrey Ptak, director of ratings at Morningstar. ratings director of Morningstar, based on an analysis of approximately $1.7 trillion. Funds by US target date.

However, even beyond retirement accounts, Russia’s access to US markets is limited. Of the more than 2,400 companies listed on the New York Stock Exchange, only three are Russian.

The data shows that investors in US companies also face little exposure to Russia. A FactSet analysis estimates that the share of total revenue going to Russia and Ukraine among S&P 500 companies is 1%.

“If you go back and read [earnings] Transcripts from a few months ago, when companies were asked about this, they said they didn’t have much of a chance to come into direct contact with Russia and Ukraine,” said Lori Calvasina, head of US equity strategy for RBC Capital Markets, said.

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At the same time, this week’s action in commodity and bond markets raises the prospect that even good results by US companies may not benefit markets as much as it has recently. Investors braced for the Federal Reserve to raise short-term interest rates for the first time since 2018, an attempt by the central bank to begin normalizing the economy following stimulus rounds. related to Covid in the past two years.

Investors often predict that the Fed will hedge any economic slowdown by keeping a cap on interest rates, but it’s not clear that that assumption still holds true at a time when inflation is at its hottest in the world. 40 years.


Russian forces force civilian Kharkiv to increase insurance premiums

Moscow redirects its approach after failing to launch a quick invasion of Ukraine

Firefighters surveyed the scene of Wednesday’s shelling at Constitution Square in Kharkiv, Ukraine’s second largest city.

sergey bobok / Agence France-Presse / Getty Images

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On Wednesday, Fed Chairman Jerome Powell said he would propose a quarter of a percentage point rate hike at the central bank’s meeting this month. Although he said it was too early to determine how the conflict in Ukraine and corresponding Western sanctions would affect the US economy, he showed a growing urgency to continue further tightening monetary policy.

On the banking side, the consequences of past instability in the region have made Russia’s financial system less disrupted. Jennifer McKeown, head of global economics at Capital Economics, said Western banks have reduced their exposure to Russia since the 2014 annexation of Crimea.

“If more serious adverse consequences occur, we think they will be more likely related to trade and supply shortages than to financial market disruptions,” she wrote in a note on Thursday. Two.

Overall, Western banks have a total of $86 billion in exposure to the Russian private sector as of September, according to data by Capital Economics. This is down from $216 billion in 2013. Banks in Italy and France each have more than $23 billion, while Austrian banks have more than $17 billion.

There is less risk on the books of US banks. On Monday, Citigroup said it has nearly $10 billion in total assets exposed to Russia, but that’s only a fraction of its $2.29 trillion total. Citigroup halved its exposure in Russia after Russia annexed Crimea in 2014, and the bank and others have refrained from placing large bets in the country since.

At Goldman Sachs Group Inc.,

That number was at more than $1 billion as of December, compared with total assets of $1.46 trillion.

Write letter for Caitlin McCabe at caitlin.mccabe@wsj.com and Charley Grant at charles.grant@wsj.com

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