Investors on Friday got a taste of the sort of market shock that could come if Russia invades Ukraine.
The spark came as Jake Sullivan, the White House national security adviser, warned Friday afternoon that Russia could attack Ukraine “any day now,” with Russia’s military prepared to begin an invasion if ordered by Russian President Vladimir Putin.
U.S. stocks extended a selloff to end sharply lower, with the Dow Jones Industrial Average
dropping more than 500 points and the S&P 500
sinking 1.9%; oil futures
surged to a seven-year high that has crude within hailing distance of $100 a barrel; and a round of buying interest in traditional safe-haven assets pulled down Treasury yields while lifting gold, the U.S. dollar and the Japanese yen.
Putin and U.S. President Joe Biden were slated to talk by phone Saturday in an effort to defuse tensions.
Analysts and investors have debated the lasting effects of an invasion on financial markets. Here’s what investors need to know.
Energy prices set to surge
Energy prices are expected to soar in the event of an invasion, likely sending the price of crude above the $100-a-barrel threshold for the first time since 2014.
“I think if a war breaks out between Russia and Ukraine, $100 a barrel will be almost assured,” Phil Flynn, market analyst at Price Futures Group, told MarketWatch. U.S. benchmark oil futures
” the global benchmark closed at $94.44 a barrel.
“More than likely we will spike hard and then drop. The $100-a-barrel area is more likely because inventories are tightest they have been in years,” Flynn said, explaining that a monthly report Friday from the International Energy Agency warning that the crude market was set to tighten further makes any potential supply disruption “all that more ominous.”
Beyond crude, Russia’s role as a key supplier of natural gas to Western Europe could send prices in the region soaring. Overall, spiking energy prices in Europe and around the world would be the most likely way a Russian invasion would stoke volatility across financial markets, analysts said.
Fed vs. flight to quality
Treasurys are among the most popular havens for investors during bouts of geopolitical uncertainty, so it was no surprise to see yields slide across the curve Friday afternoon. Treasury yields, which move the opposite direction of prices, were vulnerable to a pullback after surging Thursday in the wake of a hotter-than-expected January inflation report that saw traders price in aggressive rate increases by…