What Wall Street is watching in Ukraine crisis

Adam Shell, USA TODAY 1:39 p.m. EST March 3, 2014

Wall Street has a new worry: the escalating conflict between the Ukraine and Russia. Here are five things investors are watching.



(Photo: Richard Drew, AP)

Story Highlights
Wall Street is watching to see if political crisis turns into economic one
Key question is if hostilities result in full-fledged war
European economy at risk due to close proximity to hot spot

Geopolitical risk, saber rattling and war talk are not new to Wall Street.

The stock market survived the Cold War, European conflicts in Kosovo and Georgia, recent U.S. wars in the Middle East, and current political upheaval in places like Syria and Egypt.

The Standard & Poor's 500 stock index, if you recall, closed at yet another all-time high Friday, and the world hasn't been a terribly friendly place at times during the march higher.

History also shows that market shocks caused by war, terrorism and other fear-rattling events tend to be short-lived.

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In 14 shocks dating back to the attack on Pearl Harbor in December 1941, the median one-day decline has been 2.4%. And the shocks, which also include the Sept. 11 terror attacks and the 1962 Cuban missile crisis, lasted just eight days, with total losses of 7.4%, data from S&P Capital IQ show. The market recouped its losses 14 days later.

So what's Wall Street watching now as the conflict in Ukraine heats up after Russia's military move into Crimea, the southern Russian-speaking part of the Ukraine.

Here are five things to watch:

1. Will political crisis bleed into economic crisis?

While Russia's troop movements into Crimea are unnerving and cause an initial knee-jerk reaction to sell risky assets, the ultimate question is whether the impact causes major economic headwinds in Europe, the U.S. and the rest of the globe.

Strict trade sanctions on the Russians, for example, could cause Russia to pull back on all energy exports to Europe, which could cause harm to Europe's economy, which could then spread to the U.S.

But for now, Wall Street doesn't view the conflict as a major economic event, despite a 2% jump in oil prices and stock market weakness around the globe.

"It appears that the markets -- at least for now -- are recognizing that problems in Ukraine provide significantly greater geopolitical risk than economic and market risk to the U.S. at this time," says John Stoltzfus, a market strategist at Oppenheimer.

2. Will hostilities morph into actual war?

"Stating the obvious, the key is fighting," says Andy Busch, a market strategist and editor of The Busch Update. "So far, there hasn't been much if any. I don't think the Ukraine has the money to fight a war at this point despite Russian troops on their soil. I expect the standoff to remain with a tense 'war of nerves' between Moscow and Kiev, keeping the markets in a 'risk-off' mode."

3. Will talk of Cold War redux spook investors?

The underlying fear in the Russia v. Ukraine faceoff is that it will somehow morph into a USA v. Russia-style return to a new Cold War. But that's probably an overblown risk, Tobias Levkovich, chief U.S. equity strategist at Citigroup, told clients in a report.

"A return to the Russian / U.S. Cold War days seems to be too pessimistic of a perspective," Levkovich wrote.

4. Will shock take toll on risk-taking. Markets hate uncertainty. And a conflict that involves Russia and is occurring in a key economic part of the globe like Europe could cool risk-taking until tensions ease, says Craig Johnson, a techncial market analyst at Piper Jaffray.

Investors may be unwilling to pay up for stocks, which could cause stock valuations to come in a bit, putting downward pressure on stocks prices.

"A further escalation of the present crisis could lead to an excuse for investors to take some money off the table," says Johnson.

5. Will Europe's economy take lethal hit?

The eurozone is emerging from recession and can't afford an economic shock. But economic sanctions against Russia to force it to withdraw from Crimea could hurt Europe.

Says Busch: "This has the potential to spill over into trade sanctions and Russia pulling back on all energy exports to Europe. Therefore, the end-game is how bad will this hurt Europe?"





A pro-Russian man wearing the Russian national flag on Monday walks past General Staff Headquarters of the Ukrainian Navy as unidentified gunmen stand outside in Sevastopol, Ukraine.(Photo: Andrew Lubimov, AP)


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