Russia Orders Troops Into Ukraine, Causing Stocks And Oil To Fall

Key Takeaways:

• Russia Sends Troops into Two Regions of Ukraine That Have Declared Their Independence
• The Economic Side of Russia and the Ukraine Paints a Complicated Picture
• Retailers Take Center Stage for Earnings Reports with Home Depot, Macy’s, and Dillard’s

Stocks fell as Russian President Vladimir Putin ordered troops into two regions of Ukraine. The Donetsk and Luhansk regions have decided to break away from Ukraine, and on Monday, the Russian parliament voted to recognize these regions. Then on Tuesday, President Putin ordered troops into the regions. In his afternoon press conference, United States President Joe Biden said that Russia was claiming areas past these two regions and well into central portions of Ukraine.

Furthermore, President Biden outlined the sanctions the United States, European Union, and many of their allies are putting on Russia for its invasion. First, Russian banks won’t be able to sell bonds in the United States or Europe. This means Russia could struggle to find the money needed to fund its military operations. However, there’s some concern that Russia can circumvent these sanctions by selling debt to China.

Second, President Biden said that there will be sanctions on Russian elites and their family members. He didn’t go into detail on what these sanctions would be, but President Biden said these sanctions are meant to hurt some of President Putin’s supporters.  

Finally, President Biden has worked with Germany to ensure that the Russian oil pipeline Nord Stream 2 will not go into use while Russia occupies Ukrainian territory. The 750-mile Nord Stream 2 pipeline that runs from Russia to Germany was completed in September but is not in use yet because it must be certified by Germany.

This morning, German Chancellor Olaf Scholz expressed his disappointed in President Putin’s actions and said that Germany would not certify the Nord Stream 2 gas pipeline. Russia has been pushing for certification of the pipeline and until recently had found an ally with Germany despite opposing pressure from fellow members of the European Union.

President Biden called these sanctions the first “tranche” and that more would follow if Russia continued with its occupation of Ukrainian territories.

Stocks had fallen dramatically before President Biden’s speech with the S&P 500 (SPX) down about 2%. However, stocks rallied from these lows, and the SPX closed the day about 1% lower. Similar results were seen in the other major indices including the Nasdaq Composite ($COMP), which closed 1.23% lower. The Dow Jones Industrial Average ($DJI) was hit the hardest, falling nearly 2.2% before trimming losses to close 1.42% lower.

President Biden assured Americans that the sanctions would be aimed at hurting the Russian economy and not the United States or global economies. This appeared to refer to not standing in the way of current Russian energy outputs. As expected, oil futures have been very volatile on the day, trading about 1.7% lower and shooting up as high as 5%. However, oil prices retraced its gains and closed just 1.51% higher.  

Likewise, natural gas futures were also quite volatile, rising more than 9% during the day but drastically cutting its gains to close just 1.56% higher. Volatility was also experienced in other petroleum-related markets. Heating oil futures ranged between gains of more than 4% and losses of about 1.2% before closing about 0.95% higher on the day. Last but not least, RBOB gasoline futures closed about 1.39% higher after falling about 1% and rallying more than 4% throughout the day.

The geopolitical uncertainty had investors buying and selling gold throughout the day, but in the end, gold futures closed relatively flat despite the intraday volatility. In spite of the uncertainty and fear around the Russian invasion, investors were selling Treasury bonds. The 10-year yield Treasury (TNX) rose 0.83% as investors looked to leave the safety of bonds.

Follow the Rubles

While Russia has the 11^th largest economy by gross domestic product, it’s actually smaller than Italy, Canada, and South Korea. However, when it comes to commodities, Russia is a leader in commodity production. According to the U.S. Energy Information Administration, Russia was third in oil production for 2020, behind the United States and Saudi Arabia. So, while Russia’s many observers don’t believe Russia can afford an all-out war with the United States and its allies, there are some economic advantages for Russia to push into Ukraine.

Russia provides 40% to 50% of Europe’s gas, and about 200 billion cubic meters goes through the Ukraine gas pipe system in which the country collects about $1.2 billion in fees from Russia, according to the Oxford Institute of Energy Studies. Russia’s Nord Stream 1 pipeline runs from its shores, along the floor of the Baltic sea, and into Germany. The recently completed Nord Stream 2 pipeline runs next to it. Germany actually buys up to 55% of its natural gas from Russia, so if the pipeline was to open, Russia could bypass Ukraine.

So, there are several layers here. The obvious one is the savings Russia gains from not going through Ukraine and the revenue Ukraine loses with the gas going elsewhere. Russia is complaining that the United States and the European Union are pressuring Germany not to certify the pipeline and are adding Ukraine to NATO just so NATO forces can sit on another Russian border. Additionally, Russia suspects the United States is also pushing the turmoil as a way to promote U.S. gas sales in Europe.

Ukraine may be going along with the United States and the European Union so it won’t lose the revenues from Russia gas being pumped through their systems. It can also profit from allowing NATO forces to build bases on Ukrainian soil.

Russia appears to be applying its own pressure by using Ukraine as leverage to push through the certification of the pipeline. If Russia can’t save money using its already built pipeline, perhaps it can save money through the control of Ukraine. Once in control of Ukraine, there should be less opposition to using the Nord Stream 2 pipeline.

Some analysts don’t believe the Russian invasion is about economics and that President Putin hopes to restore Russia to its former U.S.S.R. and all its glory and power. This may be true, but it’s hard to read the mind of Mr. Putin whereas we can try and follow the rubles.

U.S. Markets

Outside of geopolitical developments, earnings season moves forward as retailers start to take center stage among those reporting. Unfortunately, the retailers’ debut acts were disappointing. Home Depot (HD) announced better-than-expected earnings and revenues, but the stock fell almost 9% after giving conservative guidance for its fiscal 2022 year.

Department stores Macy’s (M) and Dillard’s (DDS) also reported earnings. Macy’s beat on top and bottom line estimates and provided a fiscal year outlook above what analysts were expecting. The stock rallied more than 6% in premarket trading but sold off throughout the day and closed 4.98% lower. Likewise, Dillard’s was also able to beat on both metrics and rally 8.33% in premarket trading but ended up falling 4.42%. It ended up being a tough day for retail, and the Dow Jones U.S. Retail Index fell 2.88%.

However, med-tech company Medtronic (MDT) rallied more than 2% on a positive earnings report.

At the end of the day, every sector in the S&P 500 closed in the red.

TD Ameritrade® commentary for educational purposes only. Member SIPC.