Oil prices and global stock markets swung wildly Thursday after Russia launched an invasion of Ukraine, raising fears of a wider economic crisis that could follow.
Wall Street started the day with a sharp decline, following European and Asian stock markets lower before rebounding. By the market close in New York, the S&P 500 had shrugged off its early losses and closed with a 1.5% gain.
At one point, the price of oil jumped past $105 a barrel and European natural gas futures soared more than 50%, but energy prices fell after President Joe Biden said the United States and other nations were considering a combined release of oil from strategic reserves.
In remarks from the White House, Biden said the United States was imposing what he described as crushing sanctions that include cutting off Russia’s largest banks and companies from Western financial markets and restricting U.S. exports of technology to Russia.
He also said the United States was freezing trillions of dollars in assets, including funds controlled by Russian elites and their families.
As Russian forces drove into Ukraine, the potential for a wider war whipsawed the equities market. The war and the sanctions increased the risk of runaway inflation, posing profound questions for the Federal Reserve and other central banks. Worries about inflation had already soured the mood in stock markets this year, and the potential for an invasion of Ukraine only added to those concerns. In the week through Wednesday, the S&P 500 had fallen 5%, and even after Thursday’s gain the index is down 10% this year.
“Russia invading Ukraine has added to an already tense year, with investors selling first and asking questions later,” said Ryan Detrick, chief market strategist at LPL Financial.
As the day went on, after the initial market losses, people began buying stocks, though deeper fears lingered. The Russia-Ukraine crisis could slow global economic growth sufficiently to cause a recession, creating a dilemma for central banks. Their interventions have reversed many steep global stock market declines in the past, but they have less room to do so now.
That’s because central banks like the Fed are already committed to raising interest rates to combat inflation. The conflicting goals of slowing the economy to bring down prices, while potentially needing to stimulate the economy to ward off a recession, put central bankers in an awkward situation.
“There’s clearly a lot less scope for them to actually loosen now given how tight labor markets are and how difficult a problem inflation is,” said Neil Shearing, chief economist for Capital Economics.
If a protracted conflict causes steep increases in prices — for oil and natural gas; for metals like nickel, aluminum and palladium; and for agricultural staples like wheat and sunflower oil — the effect could spill over into the real economy and raise the inflation level in Europe and the United States by as much as 1.5 percentage points in the next few months, Capital Economics said. Inflation in the United States is already at 7.5% annually.
For the moment, though, the volatility in financial markets has been head-spinning. Stocks in Moscow collapsed, with the major bench mark down 33.3%, and the ruble fell to a record low against the dollar.
Even after oil prices came down, they remained at levels not seen since 2014. Brent crude oil, the global bench mark, settled just below $100 in New York. West Texas Intermediate crude also ended higher, at $93 a barrel.
After rising more than 50%, Dutch front-month gas futures, a European bench mark for natural gas, ended about 33% higher at 118.50 euros per megawatt-hour. Russia provides more than a third of the European Union’s gas, with some of it running through pipelines in Ukraine. A year ago, the gas was selling for about 15 euros a megawatt-hour.
The ultimate goals of President Vladimir Putin of Russia aren’t yet clear, and Western sanctions are being increased in increments in an effort to persuade him that the costs of a full-scale invasion and occupation of Ukraine will be too high for Russia to bear, said Angela E. Stent, a former national intelligence officer for Russia and Eurasia at the National Intelligence Council.
On Tuesday, Germany halted certification of the Nord Stream 2 natural gas pipeline that would link it with Russia. The following day, Biden imposed sanctions on a subsidiary of Gazprom, the Kremlin-controlled company that is behind the pipeline.
Combined with the sanctions announced Thursday, Biden said, these measures “will so weaken” Russia that it will give Putin “some difficult decisions.”
Putin has been pushing for more than a decade for Western recognition “of a Russian sphere of influence in the post-Soviet states,” and he may not stop unless he is forced to do so, Stent said in an online Council on Foreign Affairs conference Wednesday.
In anticipation of the new sanctions, bank stocks fell faster than the markets overall. Shares of European banks with the biggest Russian operations plunged: Raiffeisen of Austria fell 23%, while UniCredit of Italy fell 13.5% and Société Générale of France lost about 12%. In the United States, JPMorgan Chase fell about 2.8% and Citigroup slid 4%.
Energy stocks fell Thursday, but they have been a bright spot for investors who have owned them in 2022. With a gain of more than 19%, energy is the only sector in the S&P 500 to be up for the year. Halliburton, Occidental Petroleum, Marathon Oil, Hess and Exxon Mobil are among the fossil fuel stocks that have gained more than 20% in 2022.
Investors seeking safety in the market storm flocked to the usual havens — Treasury bonds and gold.
“Treasurys provide protection in an environment like this,” said David Rosenberg, chief economist of his own firm, Rosenberg Research, in Toronto. “I think recession risks are rising, and there has never been a recession in modern history where long-term Treasurys didn’t make you money.”
Bond yields, which move in the opposite direction of prices, fell. The yield on the benchmark 10-year Treasury, which was as high as 2.045% on Feb. 15, fell to 1.96% on Thursday.
And gold, which was less than $1,770 an ounce in November, rose above $1,924 at one point in New York, before falling to $1,899.
“Gold has always been one of the places you want to go in a crisis,” Rosenberg said.