Escalating tensions between Russia and Ukraine roiled financial markets on Tuesday, with stocks on Wall Street falling and oil prices rising as investors tried to gauge the risk of a larger conflict in the region.
The S&P 500 fell more than 1 percent in afternoon trading, while the Nasdaq composite fell more than 1.2 percent, turmoil that came as several countries announced economic responses after Russia’s president, Vladimir V. Putin, ordered troops into two breakaway regions in eastern Ukraine.
The declines on Tuesday put the S&P 500 more than 10 percent off its most recent peak, from Jan. 3, a drop that is known on Wall Street as a correction. It’s the kind of big, round number that helps crystallize the view that the mood in markets has substantially shifted, and it doesn’t happen often. The last time stocks fell more than 10 percent was February 2020, when investors were in a panic over the emerging coronavirus pandemic.
The measures against Russia included Germany’s decision to halt certification of the Nord Stream 2 natural gas pipeline that would link the country with Russia and Britain’s decision to sanction five Russian banks and three individuals.
President Biden also announced a “first tranche” of sanctions, against two of Russia’s largest financial institutions and Russia’s sale of government debt in international markets.
“That means we’ve cut off Russia’s government from Western finance,” he said. “It can no longer raise money from the West.”
The trading on Tuesday included some indications that investors were hopeful the conflict, and its economic ramifications, could be contained. Stocks in Europe recovered from an early swoon and ended slightly higher. The MOEX, Russia’s benchmark stock index, gained about 1.6 percent, reversing a decline of more than 9 percent.
Oil prices also settled, somewhat. After climbing to nearly $100 a barrel, Brent crude, the international benchmark, was trading near $97 a barrel, up more than 1 percent.
It might have calmed nerves that Russia’s measures, and the response to them, fell far short of the full-scale invasion some have worried about, said Caroline Simmons, the U.K. chief investment officer at UBS Global Wealth Management.
“I suspect it’s a sort of hope that this move has been made, some sanctions will be applied, but obviously not the full scale of sanctions,” she said. “But if it continues to escalate, then obviously that would be very bad for the markets,” she added.
A war between Ukraine and Russia is likely to disrupt global supply chains of commodities, causing food and energy costs to rise and increasing the risk of a prolonged period of faster inflation. Russia is the world’s largest supplier of wheat and is a critical source of energy for Europe, providing nearly 40 percent of the continent’s natural gas and 25 percent of its oil. An extended conflict could worsen Europe’s already high energy bills.
Asian stock markets closed lower. The Hang Seng Index in Hong Kong fell 2.7 percent, its worst day since July, and the Nikkei 225 in Japan dropped 1.7 percent.
“All in all, market reaction still remains disciplined even though more volatility can be expected as the political and military situation evolves and potentially escalates,” Gregor Hirt of Allianz Global Investors wrote in a note.
The potential global economic ramifications of the conflict in Ukraine had encouraged traders to seek the safety of Treasuries, which pulled down yields for the benchmark U.S. bonds. But investors have another concern on their minds: how far and how quickly the Federal Reserve will raise interest rates, which are currently near zero, to tackle inflation. Higher interest rates could slow the economy by discouraging spending and investment.
About a week ago, yields of the 10-year Treasury note passed 2 percent, their highest since mid-2019, as traders prepared for the rate increases. On Tuesday, the yield hovered around 1.93 percent. As bonds rise in price, yields fall.
The potential for rate increases, which could start as soon as March, has made owning risky assets, like technology stocks, unattractive to investors. Several indicators are already in correction territory, including the tech-heavy Nasdaq composite, which is down more than 17 percent since its high in November.
Shares of Meta, Facebook’s parent company, have fallen about 40 percent since the start of the year, while Microsoft is down nearly 15 percent and Alphabet, Google’s parent company, has fallen nearly 11 percent.
There have been 10 corrections in the past 22 years, data from Yardeni Research shows, and they averaged a decline of nearly 25 percent. But they’re not always such sharp declines. In early 2018, for example, stocks fell slightly more than 10 percent, and the correction itself lasted less than two weeks.