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Market Update

Winners and Losers as Putin Moves Into Ukraine

While investors try to guess Putin's next move, and how Western nations will react, here's the market impact we can see right now.

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Moments after Russia recognized rebel-held areas of Eastern Ukraine as independent states Monday night Russian military forces started pouring into the area under the banner of a "peacekeeping operation."

The Losers

Following Putin’s announcement, the ruble weakened against the dollar by 3%, the most since early 2020. Russia’s benchmark stock exchange continued its monthslong slide on Tuesday morning, falling as much as 11% and extending year-to-date losses to 28% with economically sensitive sectors such as banking, mining, and construction declining the most.

In Western Europe the S&P 350 Europe Index retreated 2% in the morning, though it pared losses as investors stepped back to see how far Western sanctions would actually go.

The region’s biggest losers included energy firms exposed to the Gazprom-led Nord Stream 2 pipeline project, including Uniper (UN01), down 3.4% intraday, and Fortum (FOT), which slid 4.2%, after Germany’s move to halt the pipeline’s certification.

European banks exposed to Russia were also among the day’s worst performers. They included Austria’s Raiffeisen (RBI), down 7%, and Erste Bank (EBS), off 3.5%. France’s SocGen (GLE), down 0.7%, exposure was cushioned by media reports that its unit Rosbank positioned it to help other lenders with Russian transactions.

The Outperformers

The overnight shock didn’t just have losers on the stock market. With Brent crude oil futures spiking to a seven-year high of close to $100 a barrel, European majors including Shell (SHEL), up 1.7%, BP (BP) gained 0.7%, and Eni (ENI), which advanced 1.2%, are clear outperformers rising above Monday’s close.

The sector’s outperformance was even clearer in the U.S., with Exxon (XOM), ConocoPhillips (COP), and Chevron (CVX) riding the crude price rally to rise premarket. This is in line with Morningstar strategist Allen Good’s prediction in late January that U.S. energy majors stronger focus on crude oil makes them a better bet on rising geopolitical risk premiums.

A return to armed conflict in Europe is also raising the prospect of increased defense spending in the West. "The heightened threat environment is likely to put upward pressure on the defense spending outlook for NATO members," Berenberg analysts led by Ross Law wrote in a note last week.

The threat of pricier raw materials as a result of reduced Russian supplies is tempering some of the tailwind for defense stocks. Tuesday’s outperformers included all European defense majors. In its note, Berenberg highlighted BAE Systems (BAESF), up 0.4%, Airbus (EADSF) which rose 1.3%, and Rheinmetall (RNMBF) which gained 1.9%, as particularly well-positioned to benefit from conflict-driven demand.

Lingering Doubt

It remains unclear whether Russia’s move into two secessionist areas was Putin’s objective or just a precursor to a much larger campaign against Ukraine. The conflict’s impact on markets heavily depends on the severity of Western economic sanctions, which were still taking shape on Tuesday.

"We doubt the full scale of sanctions threatened by the West will be rolled out," UBS CIO Mark Haefele wrote in a note after the latest developments. "This will allow the international community to keep the door open to diplomatic efforts, and to minimize collateral damage to the European and global economy." 

Morningstar.com does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.