Key takeaways

  • In the face of troubling conflicts across the globe, capital markets remain generally unaffected to this point.

  • Questions about the level of support for Ukraine in its war against Russia have emerged recently with the war now in its third year.

  • The conflict between Israel and Hamas has resulted in a significant human toll, as regional military tensions continue.

Tensions appear to be rising across the globe as two conflicts commanding the world’s attention persist. The destructive Russia-Ukraine war is now in its third year, with western nations putting up a less unified front against Russia than was initially the case. In the Middle East, there are growing concerns that the Israel-Hamas conflict which began with a surprise Hamas attack on Israel in October 2023 could turn into a wider war. Israel and Iran have undertaken military actions against each other in recent weeks.

One of the initial consequences of the Israeli-Hamas conflict was a series of attacks by Yemen-based Houthi rebels on cargo ships in the Red Sea. These have continued, and the U.S. military has, in a limited way, been pulled into the conflict, focused chiefly on efforts to protect Red Sea shipping lanes.

Such geopolitical events force government policymakers, central bankers and corporate leaders to contend with unique variables on a scale not experienced in decades. The impact on capital markets, to this point, appears limited, as investors remain more focused on factors such as central bank policies, the interest rate environment, economic growth and corporate earnings. Is it possible that geopolitical conflicts will raise issues for the economy and capital markets as well?

 

A new phase of the Russia-Ukraine conflict?

The Russia-Ukraine conflict was seen as a stalemate for an extended period, but in recent months, Russia appears to have made some advances. In addition, Russia continues to wage air strikes on various Ukrainian targets. Nevertheless, entering the war’s third year, neither side seems to be close to achieving its objectives. “Russia is struggling against the backdrop of a supreme leader [Putin] who is bound and determined in his objective of taking military control over Ukraine,” says David Bridges, senior geopolitical and security advisor at Fidelity Management and Research Company. Bridges, who had a former operations officer at the CIA, including significant time in the former Soviet Union and Eastern Europe, says Putin may have deceived himself about the level of effort that was required to potentially claim a victory in Ukraine. Yet Putin has remained persistent in maintaining military pressure despite significant casualties that have accumulated over the war’s first two years.

“Putin went into the war convinced that he can prevail, and that all he needs to do is push harder,” says Bridges. Over the first two years of the war, the U.S. and other Western nations contributed significant financial aid and military equipment to support Ukraine’s army and its ongoing operations. In late 2023 and early 2024, additional U.S. funding ran into Congressional roadblocks, significantly delaying a major infusion of U.S. aid. European nations continue to support Ukraine’s efforts, but aren’t in a position to provide military support comparable to what the U.S. offers. The reluctance of some U.S. policymakers to remain solidly behind Ukraine’s efforts raises questions about the future direction of the conflict. In the meantime, the fighting continues with Ukraine determined to prevent a further takeover of land.

 

Expanding conflict in the Middle East?

The Israel-Hamas conflict is the latest in a long series of Middle East military encounters that have occurred frequently. The situation intensified following the October 2023 attack on Israeli territory by Hamas. Israel responded with its own invasion of the Gaza Strip, using ground troops and massive aerial bombardment. In response, Houthi rebels have attacked commercial and military ships in the Red Sea, a major navigation waterway leading to the Suez Canal. More recently, Israel bombed Iranian targets, leading to a retaliatory strike from Iran and a similar response back from Israel. These events raised concerns that the Middle East situation could become more widespread. However, to this point, hostilities have been primarily limited to Israel and the Gaza Strip.

 

Geopolitical implications

One result of Russia’s aggressive stance toward Ukraine is an expansion of NATO membership. Finland, which shares an 830-mile border with Russia, was accepted as part of the alliance in 2023. Sweden was added in 2024. Along with military equipment to support Ukraine, western nations continue to apply severe economic sanctions on Russia. President Joe Biden announced stepped-up sanctions against Russia in late February 2024.

NATO’s European Footprint
(Lightly-shaded countries are NATO members)

Map depicts NATO-member countries in Europe.

Source: North Atlantic Treaty Organization. The U.S. and Canada are also NATO members.

Current NATO members

  • Albania
  • Belgium
  • Bulgaria
  • Canada
  • Croatia
  • Czechia
  • Denmark
  • Estonia
  • Finland
  • France
  • Germany
  • Greece
  • Hungary
  • Iceland
  • Italy
  • Latvia
  • Lithuania
  • Luxembourg
  • Montenegro
  • Netherlands
  • North Macedonia
  • Norway
  • Poland
  • Portugal
  • Romania
  • Slovakia
  • Slovenia
  • Spain
  • Turkiye
  • United Kingdom
  • United States

Bridges believes Russia’s invasion of Ukraine could represent a new era, or second Cold War, that will differ distinctly from the previous three decades. In the new environment, economic weapons, much like those being imposed on Russia today, may be a primary form of combat, as both sides seek to avoid actual military conflict between the U.S. and Russia.1

The situation in the Middle East is more complex. Many countries have objected to the scope of Israel’s Gaza attacks. There is a risk that more countries in the Middle East that are aligned against Israel’s interests might choose to get involved, which could broaden the conflict’s scope. “The Israel-Iran conflict does raise greater concerns that Middle East military action could become more widespread,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management.

 

Assessing the economic fallout

Given the inter-connected relationship among economies across the globe, concerns about the worldwide economic fallout persist. Energy is a key part of the equation on multiple fronts. For example, Russia provides approximately 10% of the world’s oil output. Russia, in coordination with the Organization of Petroleum Exporting Countries (OPEC)+, has implemented supply cuts.2

“If global tensions continue to escalate, this would clearly present a negative event risk that could have a detrimental impact on markets, at least on the margins,” says Tom Hainlin, national investment strategist at U.S. Bank Wealth Management.

The impact is significant for Europe. For example, prior to the war, Russia supplied about one-third of European natural gas and about one-quarter of its crude oil imports.3 “Europe benefited from two consecutive mild winters that helped to moderate energy demand” says Haworth. “Nevertheless, the war is clearly contributing to economic challenges facing Europe today.”

Concerns again rose about the direction of oil prices after the Israel-Hamas war began in October 2023, particularly when attacks on container ships on the Red Sea occurred. Those attacks prompted many shippers to divert traffic to much longer routes away from the Red Sea. Oil prices have risen only modestly as a result. “Oil prices remain elevated but aren’t breaking through to higher price levels at this point,” says Haworth. “We’re not yet seeing a ramping of sanctions that would further restrict oil output from Iran.” Despite some concerns, Haworth sees little risk of a 1970’s-style oil embargo by Middle Eastern oil producing countries opposed to Israel’s actions. “Many Middle Eastern countries are too dependent on the income from oil sales, so most can’t afford to cut production or deliveries in any significant way,” says Haworth.

Chart depicts crude oil prices per barrel: 12/30/2021 - 4/15/2024.
Source: U.S. Energy Information Administration, Crude Oil Prices: West Texas Intermediate (WTI) – Cushing, Oklahoma, retrieved from Federal Reserve Bank of St. Louis. Data as of Apr. 15, 2024.

Both Russia and Ukraine are major suppliers of wheat and other agricultural products to various parts of the world. This contributed to a temporary spike in agricultural commodity prices in the early weeks following Russia’s invasion of Ukraine in February 2022. While there are some challenges shipping wheat due to the war in Ukraine, supplies are now moving more smoothly, and wheat prices dropped as a result.

Chart depicts wheat prices on the Chicago Board of Trade between January 2022 - April 19, 2024.
Source: WSJ.com. Price represents value of 5,000 bushels of wheat, traded on Chicago Board of Trade. As of Apr.19, 2024.

“In the U.S., we’re a bit more insulated from the economic fallout from the conflicts compared to other parts of the world,” says Tom Hainlin, national investment strategist for U.S. Bank Wealth Management. Yet he points out that there is a greater risk for multinational companies. “If global economies slow as a result of the current conflicts, it may have a negative impact on business activity and for American companies.”

 

Investment considerations in a period of uncertainty

From an investment perspective, the current conflicts have been overshadowed by other developments, such as the state of the U.S. economy, monetary policy, and corporate earnings. “If global tensions continue to escalate,” says Hainlin, “this would clearly present a negative event risk that could have a detrimental impact on markets, at least on the margins.”

Haworth notes that escalating global tensions have yet to raise significant concerns for capital markets. Even after the Israeli-Hamas war began, U.S. stocks closed with two strong months at the end of 2023 and continued to perform well in 2024’s first quarter. Stocks retreated a bit in April’s first weeks. “To this point, the market seems to be responding more to fundamental economic and monetary policy factors than by global military conflicts,” says Haworth.

Be sure to talk to your financial professional about what steps may be most appropriate for your circumstances.

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Disclosures
  1. Lee, Nathanial, “The second Cold War is already beginning, experts say, and many of the battles are being fought with economic weapons,” CNBC.com, March 25, 2022.

  2. Reuters, “Exclusive: Russia sets plans for oil export cuts in August, sources say,” July 14, 2023.

  3. McBride, James, “Russia’s Energy Role in Europe: What’s at Stake With the Ukraine Crisis,” Council on Foreign Relations, Feb. 22, 2022.

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