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As Putin eyes a date to declare victory, here’s a Ukraine scenario that could slam stocks by another 10%
21 Apr 2022
Stocks are set to get a major bump on Thursday, thanks to blowout results from Tesla, which go some way in easing the sting over Netflix disappointment.
With earnings sharply in focus for now, market attention on the biggest war in Europe since World War II has faded some. While financial markets have moved past the initial shock of Russia’s brutal invasion of its neighbor Ukraine, it remains a massive, unresolved conflict.
Bringing that back into focus for investors is our call of the day from Edmond de Rothschild strategists, who lay out three possible scenarios for the conflict’s end. They all involve higher inflation, but varying degrees of economic and market risk.
The most optimistic outcome laid out by Michaël Nizard, head of multiasset, and fund manager Delphine Arnaud, involves a cease-fire and pullout of Russian troops from most of Ukraine — leaving Moscow to focus on Crimea and Donbas. Russian President Vladimir Putin would get to boast of victories for the May 9 holiday marking his country’s defeat of Nazi Germany in 1945 at the end of WWII.
Commodity prices would ease as vital Ukraine agricultural work resumes, easing the risk of wheat shortages for emerging countries. Energy prices would fall to preinvasion levels, helping reduce inflation and some easing of sanctions on Russia would also boost production circuits.
“A decline in risk aversion on the markets and the shock on consumer confidence would make it possible to envisage economic growth in 2022 close to the level expected at the beginning of the year,” said the pair, predicting U.S. markets could bounce 4%, Europe 8% and China 20%.
The second scenario envisages a stalemate, which could drag past the summer. “Although investors, like the media, gradually turn their attention away from the war in Ukraine, considering that the worst has already been priced in, the headlines would regularly return to the fore with events that could lead to fears of a shift of the conflict to a darker scenario,” said Nizard and Arnaud.
They raised the prospect of slowing activity in Europe, rationing, stoppages of agricultural work in Ukraine causing food shortages and unrest for emerging countries. A stalemate would lead to a 3% drop for U.S. markets, though modest gains for Europe and China.
They left the worst for last, a scenario in which the conflict escalates, as sanctions fail to work against Russia, or China boosts support to Moscow.
“In this scenario, our fears are a disruption of European gas supply via Ukrainian gas pipelines, NATO military intervention and an escalation of sanctions between the U.S. and China. Global growth would collapse and risk assets would see a 15% to 30% decline,” they said.
“We can wonder whether the financial markets have actually priced in the new status of the European economy, that of a war economy.”
Here’s their chart summing up those views:
The buzz
Tesla TSLA, +3.23% shares are climbing after the electric-vehicle maker posted a blowout first-quarter profit, with sales up 81% despite supply-chain problems. CEO Elon Musk also promised a robotaxi for 2024.
Hedge-fund manager Bill Ackman has thrown in the towel on Netflix shares NFLX, -3.52%, which logged their worst drop since 2004 on earnings gloom. Shares are down another 4% as one research house predicts a 50% drop ahead,
American Airlines AAL, +3.80% shares are up 10% after upbeat results. Xerox XRX, -15.67% are sinking 14% after the tech giant reported an unexpected loss. Snap SNAP, -4.36% results are due after the close.
Weekly jobless claims dropped to 184,000, near a 53-year low, while the Philadelphia Federal Reserve manufacturing survey came in softer. Leading economic indicators are still to come. Fed Chair Jerome Powell and European Central Bank President Christine Lagarde will join a global economy panel discussion. We’ll also hear from St. Louis Fed President James Bullard.
Russian forces were ordered by Putin not to storm the last Ukrainian stronghold in the besieged city of Mariupol, but block it “so that not even a fly comes through.” That’s a massive worry for the thousands of the soldiers and civilians sheltering in a massive steelworker factory.
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