Goldman Sachs is warning that the markets might be underestimating the economic fallout from Russia’s war in Ukraine.
After the invasion initially sent global markets into the red, many major stock indexes have rebounded from their slumps. Even as explosions rock Ukraine and Russia becomes further entrenched in its internationally condemned war, the Dow Jones Industrial Average and Nasdaq were in the black on Friday, with the S&P 500 cruising toward its best weekly gain since 2020.
Additionally, oil prices have eased after spiking tremendously at the outset of the invasion. Futures for Brent crude, the global oil benchmark, were at $107.40 a barrel on Friday, while the U.S. benchmark, West Texas Intermediate, was at $104.60 — a major decrease from the $130 level WTI skyrocketed to early in the war.
Goldman Sachs strategists Dominic Wilson and Vickie Chang said in a note that positive stock performance, particularly European assets, coupled with easing oil prices point to “a significant relaxation in the market’s assessment of the global implications” of Russia’s war.
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The financial services giant said that because of the apparent easing of concerns among investors, assets are “more vulnerable if progress toward a resolution proves fleeting or if energy supplies are disrupted more severely.”
This month, Russian Deputy Prime Minister Alexander Novak threatened to cut off natural gas to Germany and Europe at large in retaliation for Germany’s decision to stop certification of the Nord Stream 2 pipeline. In Goldman’s downside scenario, such action could slash European gross domestic product by 2.5 percentage points. The S&P 500 could also lose 8% of its value.
“The presence of significant downside tails that are expensive to hedge has made it hard for investors to embrace the value that has emerged in assets at various points in the past few weeks,” said Wilson and Chang. “Volatility is still very high in many asset classes, but so are the potential moves in assets in the tail scenarios.”
The news comes after Goldman Sachs cut its forecast GDP growth for the United States to 1.75% this year after previously forecasting a 2% increase.
“We now see the risk that the U.S. enters a recession during the next year as broadly in line with the 20-35% odds currently implied by models based on the slope of the yield curve,” said Goldman Sachs chief economist Jan Hatzius.
Goldman Sachs recently said it is “winding down” its business operations in Russia and will comply with the sanctions that have been levied against Moscow in response to the conflict.
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U.S. and Western sanctions against Russia have left its economy and currency, the ruble, in shambles.
The West restricted the Russian central bank from accessing a big chunk of its more than $600 billion in foreign currency reserves that could shore up its economy and blocked some major financial institutions from accessing the main system that facilitates cross-border financial transactions and money transfers.
