Investors were still trying to make sense of the breakneck reversal in financial markets that followed Russia’s launch Thursday of a full-scale invasion of Ukraine, with U.S. stocks erasing a plunge to end solidly higher.
But a look at the S&P 500
relative to a measure of market sentiment on Russia and Ukraine indicates that a weaker-than-expected round of sanctions against Moscow that was the primary driver, argued Elsa Lignos, global head of FX strategy at RBC Capital Markets, in a Friday note.
“Some take the unwind as a sign a full Russian invasion of Ukraine had already been ‘priced in’ by markets. We disagree — from the start, markets have cared not about war but sanctions — and any Russian response to those,” Lignos said.
RBC has been tracking the average of the U.S. dollar/Russian ruble
and U.S. dollar/Ukraine hryvnia
currency pairs and 5-year Russian sovereign credit default swap spread (all expressed as standard deviations from the recent mean) relative to the U.S. large-cap benchmark (see chart below).
RBC Capital Markets
Since the Russia-Ukraine crisis started to dominate the news (as tracked in the lower panel) the relationship had been extremely tight. And it intensified further between Russian President Vladimir Putin’s Monday speech and late Wednesday. But, as the chart shows, that relationship broke down Thursday afternoon after the latest round of sanctions against Moscow were announced.
The relationship had intensified, Lignos said, only because Western leaders had said an invasion would trigger “severe” sanctions. The moves that were announced by U.S. President Joe Biden on Thursday included added restrictions on Russian banks, take aim at a majority of the country’s financial sector, but Western allies balked at cutting Russia off from Swift, the financial-messaging system that links the world’s banks. Energy exports were also, as expected, left untargeted.
Analysts said the moves reflected fears about further pushing up oil and natural-gas prices as the global economy deals with surging inflation. Oil futures
briefly topped the $100-a-barrel threshold Thursday for the first time in seven years, but pared gains after the sanctions rollout.
Meanwhile, the S&P 500 built on Thursday’s bounce, jumping 1.9% to turn positive for the week. The Dow Jones Industrial Average
jumped more than 750 points, or 2.3%, leaving it down just 0.3% for the week to date, while the Nasdaq Composite
which led Thursday’s bounce, was on track for a 0.4% weekly rise.
It’s been a brutal week for Russian assets despite a late bounce. The ruble remained down more than 7% versus the dollar after hitting a record low earlier in the week, while the VanEck Russia ETF
was headed for a 31% weekly fall and has dropped by 41% since the beginning of the year. The hryvnia, meanwhile, has dropped 5% versus the dollar this week.
The takeaway, Lignos said, is that when the “politician’s definition of ‘severe’ turns out to be milder than the market’s, global risk rallies, even if Russian/Ukrainian financial assets struggle to match the gains.”