Stocks Fall, Oil Leaps As Ukraine Crisis Deepens
Russian ruble plunges to record low before recovering moderately.
Russian ruble plunges to record low before recovering moderately.
The crisis in Ukraine continued to stoke turbulence across global markets, helping send the S&P 500 lower for a second straight month and Russian markets plunging.
Major U.S. indexes swung for much of the trading session before finishing mixed. The S&P 500 lost 10.71 points, or 0.2%, to 4373.94 on Monday. The Dow Jones Industrial Average fell 166.15 points, or 0.5%, to 33892.60. The tech-heavy Nasdaq Composite Index turned higher, adding 56.77 points, or 0.4%, to 13751.40.
The S&P 500 and Nasdaq have lost 8.2% and 12%, respectively, over the past two months, each posting their worst such stretch since March 2020.
For much of February, investors were preoccupied with high inflation and the Federal Reserve’s coming interest rate hikes. This sent Treasury yields above 2% for the first time since mid-2019 and triggered a rush to bearish bets on stocks. Toward the end of the month, geopolitical concerns quickly came to the forefront as Russia invaded Ukraine, sending markets around the globe spiraling.
Monday’s trading continued a turbulent period after Russia’s invasion of Ukraine. Stock futures slid more than 2% Sunday evening and kicked off the week with declines before clawing back some of the losses.
Investors dumped Russian bonds and the ruble was on track for a record low against the dollar. Market-data services showed limited price updates Monday, suggesting few transactions were taking place. Russian sovereign debt sold off heavily, with the yield on a dollar-denominated note maturing in five years surging to 25% in trading, from 9% Friday.
“There is very little liquidity and consequently you get this gapping in the price and you’re not getting any real reflection of where the ruble would be,” said Jane Foley, head of foreign-exchange strategy at Rabobank.
An exchange-traded fund tracking Russian companies, the VanEck Russia ETF, lost $4.75, or 30%, to $10.85. Russia’s RTS index lost around a third of its value in February, its worst monthly performance since October 2008.
Russia’s central bank opted for an emergency interest-rate hike to combat a collapse in the ruble, more than doubling its benchmark rate to 20%, hours after imposing other restrictions on markets. It also temporarily banned brokers from handling sales of securities by nonresidents and kept the Moscow Stock Exchange closed Monday. It will remain closed Tuesday.
Investors turned to safer assets, sending the yield on the 10-year Treasury note down to 1.836%, from 1.984% Friday as bond prices rose. Gold prices edged higher, capping the best month since May 2021.
Though the past week has been marked by big swings, U.S. markets have remained relatively insulated from the turmoil spreading through Russian markets.
Major indexes had staged a rally in recent sessions, highlighting the importance that many investors placed on the Federal Reserve’s moves. Investors have rapidly shifted bets on the situation in Europe and how it might affect plans by the central bank to raise interest rates, with some now forecasting a smaller rate increase in March. That has helped lift stocks at times, including on Monday, when the Nasdaq eked out a gain for the third consecutive session.
“It will give the Fed a little bit more leeway to be patient,” said David Sadkin, a partner at Bel Air Investment Advisors.
Some analysts say geopolitical crises typically don’t have prolonged impacts on U.S. stocks and that they expected the recent volatility to pass. Stocks have typically declined around 6% to 8% after a geopolitical event before retracing those losses in another three weeks, Deutsche Bank strategists said in a note to clients.
And among S&P 500 companies, only 1% of revenues stem from Russia and Ukraine, according to FactSet.
“To date we have not decided that we’re going to make any changes based on what is happening in Ukraine,” said Mark Stoeckle, chief executive officer of Adams Funds.
Major indexes were volatile in trading throughout the session on the last day of the month, briefly edging into the green before collapsing again. Some investors have lately used intraday volatility to step in and buy stocks.
“This generally doesn’t impact our view of the U.S. markets,” said Mike Bailey, director of research at FBB Capital Partners, of the conflict. Mr. Bailey added that his firm had picked up shares of companies like Nvidia recently, which had been bruised this year.
Still, companies domestically and abroad faced mammoth swings. Defence stocks rallied, with U.S.-based Northrop Grumman jumping $32.47, or 7.9%, to $442.14, a record. It was one of the best performers in the S&P 500.
London-listed shares of Russian companies plunged, with Sberbank, the country’s largest lender, down 74%.
“There’s an enormous amount of volatility and nervousness,” said Fahad Kamal, chief investment officer at Kleinwort Hambros. “The risk of miscalculation or something getting out of hand has increased.”
Oil prices rose, with front-month Brent futures gaining more than 10% this month to $100.99 a barrel, notching the largest three-month percentage gain since January 2021. Brent prices last week surged to about $100 a barrel for the first time since 2014 as investors calculated how the invasion could snarl the movement of resources in the region.
Over the weekend the U.S., European Union, Canada and the U.K. said they intended to cut off some Russian banks from the Swift network, a global payment system that connects international banks and facilitates cross-border financial transfers. The U.S. said it would sanction Russia’s central bank, a move to stop the bank from deploying its more than $600 billion in reserves to aid the Russian economy.
Meanwhile, President Vladimir Putin ordered Russia’s nuclear-deterrence forces to be put on alert. The move would put Russia’s network of nuclear missiles into a state in which it could be used if necessary.
Bitcoin prices rose 11% to $41,650.25 Monday, the largest one-day gain since May.
European banks declined, with the Euro Stoxx banking subindex down 5.7%. BNP Paribas fell 7.5% and Société Générale shares dropped 9.9%.
“With Swift, there will be problems processing payments. That creates credit risk, not only for European banks with affiliates in Russia but more broadly, those with clients in Russia,” said Sebastien Galy, a macro strategist at Nordea Asset Management.
The pan-continental Stoxx Europe 600 also recouped some losses, closing down 0.1%. It finished lower for a second consecutive month, its worst two-month decline since April 2020.
In Asia-Pacific, stock markets were mixed, with major benchmarks gaining or losing less than 1%.
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Crypto’s lack of connections with traditional finance means its problems haven’t spilled over to the economy
This year’s crypto collapse has all the hallmarks of a classic banking crisis: runs, fire sales, contagion.
What it doesn’t have are banks.
Check out the bankruptcy filings of crypto platforms Voyager Digital Holdings Inc., Celsius Network LLC and FTX Trading Ltd. and hedge fund Three Arrows Capital, and you won’t find any banks listed among their largest creditors.
While bankruptcy filings aren’t entirely clear, they describe many of the largest creditors as customers or other crypto-related companies. Crypto companies, in other words, operate in a closed loop, deeply interconnected within that loop but with few apparent connections of significance to traditional finance. This explains how an asset class once worth roughly $3 trillion could lose 72% of its value, and prominent intermediaries could go bust, with no discernible spillovers to the financial system.
“Crypto space…is largely circular,” Yale University economist Gary Gorton and University of Michigan law professor Jeffery Zhang write in a forthcoming paper. “Once crypto banks obtain deposits from investors, these firms borrow, lend, and trade with themselves. They do not interact with firms connected to the real economy.”
A few years from now, things might have been different, given the intensifying pressure on regulators and bankers to embrace crypto. The crypto meltdown may have prevented that—and a much wider crisis.
Crypto has long been marketed as an unregulated, anonymous, frictionless, more accessible alternative to traditional banks and currencies. Yet its mushrooming ecosystem looks a lot like the banking system, accepting deposits and making loans. Messrs. Gorton and Zhang write, “Crypto lending platforms recreated banking all over again… if an entity engages in borrowing and lending, it is economically equivalent to a bank even if it’s not labeled as one.”
And just like the banking system, crypto is leveraged and interconnected, and thus vulnerable to debilitating runs and contagion. This year’s crisis began in May when TerraUSD, a purported stablecoin—i.e., a cryptocurrency that aimed to sustain a constant value against the dollar—collapsed as investors lost faith in its backing asset, a token called Luna. Rumours that Celsius had lost money on Terra and Luna led to a run on its deposits and in July Celsius filed for bankruptcy protection.
Three Arrows, a crypto hedge fund that had invested in Luna, had to liquidate. Losses on a loan to Three Arrows and contagion from Celsius forced Voyager into bankruptcy protection.
Meanwhile FTX’s trading affiliate Alameda Research and Voyager had lent to each other, and Alameda and Celsius also had exposure to each other. But it was the linkages between FTX and Alameda that were the two companies’ undoing. Like many platforms, FTX issued its own cryptocurrency, FTT. After this was revealed to be Alameda’s main asset, Binance, another major platform, said it would dump its own FTT holdings, setting off the run that triggered FTX’s collapse.
Genesis Global Capital, another crypto lender, had exposure to both Three Arrows and Alameda. It has suspended withdrawals and sought outside cash in the wake of FTX’s demise. BlockFi, another crypto lender with exposure to FTX and Alameda, is preparing a bankruptcy filing, the Journal has reported.
The density of connections between these players is nicely illustrated with a sprawling diagram in an October report by the Financial Stability Oversight Council, which brings together federal financial regulators.
To historians, this litany of contagion and collapse is reminiscent of the free banking era from 1837 to 1863 when banks issued their own bank notes, fraud proliferated, and runs, suspensions of withdrawals, and panics occurred regularly. Yet while those crises routinely walloped business activity, crypto’s has largely passed the economy by.
Some investors, from unsophisticated individuals to big venture-capital and pension funds, have sustained losses, some life-changing. But these are qualitatively different from the sorts of losses that threaten the solvency of major lending institutions and the broader financial system’s stability.
To be sure, some loan or investment losses by banks can’t be ruled out. Banks also supply crypto companies with custodial and payment services and hold their cash, such as to back stablecoins. Some small banks that cater to crypto companies have been buffeted by large outflows of deposits.
Traditional finance had little incentive to build connections to crypto because, unlike government bonds or mortgages or commercial loans or even derivatives, crypto played no role in the real economy. It’s largely been shunned as a means of payment except where untraceability is paramount, such as money laundering and ransomware. Much-hyped crypto innovations such as stablecoins and DeFi, a sort of automated exchange, mostly facilitate speculation in crypto rather than useful economic activity.
Crypto’s grubby reputation repelled mainstream financiers like Warren Buffett and JPMorgan Chase & Co. Chief Executive Jamie Dimon, and made regulators deeply skittish about bank involvement. In time this was bound to change, not because crypto was becoming useful but because it was generating so much profit for speculators and their supporting ecosystem.
Several banks have made private-equity investments in crypto companies and many including J.P. Morgan are investing in blockchain, the distributed ledger technology underlying cryptocurrencies. A flood of crypto lobbying money was prodding Congress to create a regulatory framework under which crypto, having failed as an alternative to the dollar, could become a riskier, less regulated alternative to equities.
Now, stained by bankruptcy and scandal, cryptocurrency will have to wait longer—perhaps forever—to be fully embraced by traditional banking. An end to banking crises required the replacement of private currencies with a single national dollar, the creation of the Federal Reserve as lender of last resort, deposit insurance and comprehensive regulation.
It isn’t clear, though, that the same recipe should be applied to crypto: Effective regulation would eliminate much of the efficiency and anonymity that explain its appeal. And while the U.S. economy clearly needed a stable banking system and currency, it will do just fine without crypto.
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