Key takeaways

  • In the face of numerous conflicts across the globe, capital markets have mostly been unaffected to this point.

  • The Russia-Ukraine war just passed its second anniversary, with growing questions about the sustainability of Western support for Ukraine.

  • The conflict between Israel and Hamas has resulted in a significant human cost, but to this point, a wider Middle East conflict’s been averted.

Investors are keeping an eye on a series of conflicts taking place worldwide, but to this point, events have not recently resulted in a significant impact on the global economy or capital markets. In February, the destructive Russia-Ukraine war entered its third year with no end in sight and growing concerns about the state of Western support for Ukraine. In the Middle East, Israel continues military operations in the Gaza Strip following the surprise Hamas attack on Israel in October 2023. To this point, fears of an expanded Middle East conflict have not materialized, though there have been issues beyond Israel’s border.

The most notable fallout from the Israeli-Hamas conflict has been in the form of attacks by Yemen-based Houthi rebels on cargo ships in the Red Sea. There have been other incidents in neighboring countries as well, and the U.S. military has, in a limited way, also been pulled into the conflict, primarily focused around efforts to protect Red Sea shipping lanes.

Such events force government policymakers, central bankers and corporate leaders to contend with a unique variable 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?

An extended period where Russian and Ukraine troops battled along Ukraine’s eastern region with little progress for either side recently shifted when Russia claimed some territory that had been previously contested. Nevertheless, Russia’s army continues to encounter notable resistance in its effort to overtake additional portions of Ukraine. Entering its 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, with some policymakers wishing to slow down or end funding for Ukraine. Agreement on providing additional U.S. funding and military aid to Ukraine remains up in the air. 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. That raises more questions about the future direction of the conflict, but in the meantime, the fighting continues with Ukraine determined to prevent a further takeover of land.

 

Expanding conflict in the Middle East?

While tensions and small military skirmishes have frequently occurred in recent Middle East history, 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. The U.S. responded with attacks on Yemen, and other areas of conflict have emerged as well.

The primary concern is if the Israel-Hamas war extends more widely across the Middle East, possibly drawing more involvement from the U.S. and other nations. 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 will be added to the NATO alliance in 2024 after it gained the final approval it needed, from Hungary, in February. 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

While NATO countries have generally remained steadfast in their support of Ukraine, they have avoided sending troops to participate in the military engagement. However, French President Emmanuel Macron recently discussed the possibility of European troops being sent to Ukraine, though no specific plans have been agreed to.

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.

 

Assessing the economic fallout

Given the inter-connected relationship among economies across the globe, concerns about the economic fallout on the worldwide economy 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 Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Nevertheless, the war is clearly contributing to economic challenges facing Europe today.”

Oil prices soared in the months immediately following the start of the Russia-Ukraine war in early 2022, but prices retreated in response to weaker-than-anticipated global demand. Concerns that oil prices could fluctuate were raised again 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. “Moderate prices may reflect a slowing in global oil demand rather than fears about supply disruptions,” says Haworth. 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.

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 Feb. 20, 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 - January 31, 2024.

Source: WSJ.com. Price represents value of 5,000 bushels of wheat, traded on Chicago Board of Trade. As of Feb. 23, 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 January 2024. “Investors seem more focused now on whether equity market strength will broaden beyond the information technology, communication services and consumer discretionary sectors that dominated stock market performance in 2023,” 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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