Stock Market’s ‘Denial Trade’ on Russian Invasion Is Buckling

(Bloomberg) — Equity markets have come round to the idea that Russia’s invasion of Ukraine could have long-term consequences for the global economy.

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European stocks slumped at the end of the week and are at the lowest in a year as the sweeping measures slapped on Russia disrupt trade with one of the world’s main suppliers of key commodities, especially energy.

U.S. stocks also declined, though by far less, reflecting the more limited exposure to Russia.

The latest moves mark a turnaround from the early reaction to the assault on Ukraine. An initial drop in stocks after the war started was followed by a rally, helped by a “buy the dip” mentality and speculation that central banks would back off on interest-rate hikes. Strategists at JPMorgan Chase & Co. and Citigroup Inc. pushed the idea of short-lived pain and that history pointed to the emergence of buying opportunities.

The contrast between hopeful markets and the messages from politicians was stark, but any optimism is crumbling as the Russian attacks intensify.

And far from being temporary, it’s more likely that sanctions will be sustained and possibly strengthened, exacerbating the pressure on countries already struggling to contain seemingly unstoppable inflation.

“It is interesting that the market did not believe that the war would start a month ago, then we did not believe that it would escalate past Donetsk and Luhansk, so, it is a bit of a denial trade,” says Marija Veitmane, senior strategist at State Street Global Markets.

Europe’s Stoxx 600 Index fell 3.6% on Friday, capping its worst week since the early days of the pandemic in 2020. The S&P 500 slipped 0.8%, a fourth decline in five days.

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The shock of the war — Russia had repeatedly denied it would invade despite its troop build-up — has catapulted commodity prices from gas and oil to wheat and aluminum to fresh records.

That’s increasing a squeeze on companies and households, with damaging implications for investment, spending and growth. So great is the threat, particularly for Europe, that…


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