U.S. investors expect more volatility as Ukraine concerns spook markets

[February 12, 2022]  By Sinéad Carew and Devik Jain

NEW YORK (Reuters) - Geopolitical worries have added another layer of volatility to an already-jumpy market as investors priced in the possibility of escalating conflict between Russia and Ukraine, though some doubted the issue would weigh on U.S. asset prices over the longer term.

Reports of rising tensions between the two countries slammed stocks on Friday and lifted prices for Treasuries, the dollar and other safe-haven assets, as investors already rattled by a hawkish turn from the Federal Reserve digested a potentially more serious conflict in Eastern Europe.

"The market is reacting because an actual invasion has not yet been priced in," said Michael Farr of Farr, Miller and Washington LLC. "The severity of an invasion, if one occurs, will correlate to the severity of the market’s reaction."

Russia has massed enough troops near Ukraine to launch a major invasion, Washington said on Friday. It urged all U.S. citizens to leave the country within 48 hours after Moscow further stiffened its response to Western diplomacy.

White House national security adviser Jake Sullivan said it remained unclear whether Putin had definitively given the order to invade, and that he expected U.S. President Joe Biden to press for a phone call soon with his Russian counterpart.

Despite Friday's market gyrations, some investors were skeptical whether a more serious conflict could be a drag on broader markets over the longer term.

Federal Reserve Chair Jerome Powell is seen delivering remarks on a screen as a trader works on the trading floor at the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S., December 15, 2021. REUTERS/Andrew Kelly

"The reaction the market is likely to have is selling until it becomes more evident what an invasion looks like and then what kind of response U.S. and European allies have to it," said Mark Luschini, chief investment strategist at Janney Montgomery Scott. "We're not suggesting making any changes predicated on the news cycle around the topic."

The benchmark S&P 500 index closed down nearly 1.9% while the tech-heavy Nasdaq was off around 2.8%. The moves followed weakness on Thursday sparked by expectations that the Fed will become more hawkish to fight surging inflation. The Cboe Volatility Index, known as Wall Street's fear gauge, was up for a second straight session and hit its highest level since the end of January.

Worries over the conflict will "create volatility until people verify it's true and what is the duration before international leadership steps in and to what extent does the rest of the world step in," said Thomas Hayes, managing member at Great Hill Capital LLC in New York.

“We just have to see how this plays out over the weekend and whether or not international leadership can bring this under wraps," he said.

(Reporting by Sinead Carew, Davide Barbuscia, Devik Jain; Writing by Davide Barbuscia; Editing by Ira Iosebashvili and David Gregorio)

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