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Jan. 24, 2022, 10:32 a.m. EST

How a Russian invasion of Ukraine could trigger market shock waves

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By William Watts

Global investors on Monday began to pay some attention to the threat of a devastating European ground war as tensions around Ukraine rose. Analysts expect traditional safe-haven assets to be in demand should Russia attack its neighbor.

In that event, the “typical kind of conflict responses” would likely be in play, including moves into long-duration Treasurys, as well as a spike in prices for oil and European natural gas, Garrett DeSimone, head of quantitative research at OptionMetrics, told MarketWatch in a Friday phone interview. Such moves could prove short-lived, in keeping with past patterns, he said.

Russian stocks and the ruble, which had already been battered by the threat of sanctions in response to an invasion, were hit hard on Monday, with the Russian RTS index tumbling nearly 8%, bringing it down around 20% for the month to date, while, the VanEck Russia exchange-traded fund RSX slumped 6%.

Talks continue, but tensions rise

In weekend developments, the State Department on Sunday ordered the families of all American personnel at the U.S. Embassy in Ukraine to leave amid worries over a potential invasion. Britain’s Foreign Office on Saturday accused Moscow of seeking to oust Ukraine’s pro-Western government and replace it with a pro-Russian administration . The Kremlin, in response, accused the U.K. of spreading disinformation.

The New York Times reported that President Joe Biden was considering sending thousands of U.S. troops , along with warships and aircraft to Eastern Europe and the Balkans over fears of a Russian invasion.

Top U.S. and Russian diplomats met Friday in Geneva. The discussions appeared to make little progress, but saw officials pledge to continue talks in an effort to defuse the crisis.

Read: U.S. and Russia agree to continue talks aimed at defusing Ukraine standoff

Moscow has moved around 100,000 troops near Ukraine in response to what it says are threats to its security from the North Atlantic Treaty Organization and Western powers. The move has stoked fears of a Russian attack.

While a direct military response from the U.S. and its Western allies is seen as off the table, President Joe Biden has vowed hard-hitting sanctions. Russia, a key supplier of energy to Europe, is seen likely using those resources as leverage in response to Western sanctions.

All about energy

Russia’s annexation of Ukraine’s Crimean peninsula in 2014 created bouts of volatility, but nothing that knocked global markets out of their stride, noted Steve Barrow, head of G-10 strategy at Standard Bank, in a note last week. Investors, however, can’t count on a similarly subdued reaction in the event of a full-scale invasion, he said.

Russia’s role as a supplier of natural gas to Western Europe means that energy prices could spark bouts of volatility across other financial markets. A conflict between Russia and Ukraine would likely cause natural-gas prices to spike, even if its only a knee-jerk reaction, Barrow said.

Earlier: Russia-Ukraine tensions mean Europe’s natural-gas volatility unlikely to fade

“Presumably other energy prices would spike in tandem and this could unnerve financial asset prices in a way that proves far more significant that we saw in 2014,” he said. “Safe-haven demand would likely increase for assets such as Treasurys, the dollar, yen and the Swiss franc.”

Read: Tensions between Russia and Ukraine aren’t fully priced into commodities

Dutch natural-gas futures jumped 16% Monday and have risen around 30% so far in January, after more than tripling in 2021. A combination of factors, including jitters over Ukraine and curtailed Russian pipeline flows, have been blamed for a surge in European natural-gas prices this winter.

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