Wall Street’s main benchmarks fell sharply Thursday as investors grappled with renewed anxiety over geopolitical tensions between Russia and Ukraine following a warning from President Joe Biden that military action by the Kremlin appeared imminent.
The S&P 500 plunged more than 2% to 4,380.04, while the Dow Jones Industrial Average shed 623 points — or 1.8% — to 34,311.18, recording its worst day since Nov. 26, 2021. The Nasdaq Composite erased nearly 2.9%, falling to 13,716.72.
The Russia-Ukraine conflict also weighed on oil and bond yields. Crude oil declined 2.15% to $91.65 per barrel, while the 10-year U.S. Treasury benchmark fell 7.5 basis points to yield 1.97%
U.S. President Joe Biden said on Thursday the threat of a Russian invasion of Ukraine was "very high" and “every indication [the White House had] is that [Russia is] prepared to go into Ukraine.”
The conflict has added a fresh headwind for markets already bracing for the Federal Reserve to raise interest rates as it looks to tighten monetary conditions to mitigate surging inflationary pressures.
Fears that the Kremlin would green-light a move to force in on its neighboring country build on the existing worries around central bank policies due to the potential of military action to exacerbate inflation and spur other economic disruptions.
“When you have a risk-off environment that we’ve been seeing all year, adding on Ukraine is certainly not going to help the situation, so I’m not surprised to see heightened sensitivity,”
Barrett Asset Management Chief Investment Officer Amy Kong told Yahoo Finance Live. “In general, we have seen through time and through stock market history, that geopolitical events have stressed the market.”
Kong added such news is typically met with shock and panic, but in due time as investors digest whether such events will impact the fundamentals of the market, if the answer is no, in the long run, that anxiety dissipates to a degree.
“If it were to get worse — which is a big if — a very strong stagflationary wind would blow through the global economy,” Mohamed El-Erian, president of Queens College at Cambridge University, told Yahoo Finance Live.
“The marketplace now is pricing somewhere between we get a good diplomatic resolution, or we stay in this uncomfortable no war and no peace. We’re not really pricing in the possibility that this may be an armed conflict.”
Stagflation occurs when economic growth slows sharply and inflation rises. "Markets continue to watch events in Ukraine, cycling back and forth between risk-on with the lessening of tensions and risk-off as tensions increase," Independent Advisor Alliance Chief Investment Officer Chris Zaccarelli said in a note.
"These morning markets are concerned about the Russian troop buildup and a lack of trust in Putin’s declaration that they are beginning to remove troops from the region."
Markets jumped earlier this week on false reports Russia withdrew some troops from the Ukrainian border, but fears of imminent military action have since resurfaced after NATO officials said Russia was continuing its buildup of troops.
The Biden administration said Russia has added as many as 7,000 military personnel to Ukraine’s border.
“We have excellent intelligence and if the Russians in fact are removing those troops, we will see it,” John Ed Herbst, former U.S. ambassador to Ukraine, told Yahoo Finance Live on Tuesday.
Investors also continued to weigh minutes from the Fed’s last policy-setting meeting that indicated officials were weighing a near-term increase on short-term borrowing costs but did not suggest a 50 basis point hike was on their agenda.
In recent weeks, the prospect central bank policymakers could scale up their hiking cycle on a string of recent red-hot inflation prints and stronger-than-expected jobs data have weighed on stocks.
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“With markets signaling the Fed’s latency on monetary policy action is a growing concern, investors were looking for any clues in the Fed minutes that allude to more aggressive policy changes in the near future,” Allianz Investment Management senior investment strategist Charlie Ripley said in a note.
“In markets, timing is everything, and the delayed reaction from the Fed has investors convinced that aggressive policy tightening is on the horizon.”
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“While not offering much to change that view, the Fed minutes did indicate a faster pace of tightening relative to the last hiking cycle is warranted,” Ripley said. “On balance, there was nothing in the minutes that suggested the Fed would be more aggressive than what the market has already priced in.” Source: Yahoo Finance; Reporter: Alexandra Semenova