Potential Russian invasion of Ukraine could tip economies into an ‘outright recession’ – Morgan Stanley

Anna Golubova

Monday February 14, 2022

With risk asset returns already under a lot of uncertainty, Morgan Stanley is warning that a potential war in Ukraine could tip some economies into a recession and present a ‘polar vortex’ risk to stocks.

A potential Russian military action in Ukraine “materially increases the odds of a polar vortex for the economy and earnings,” Morgan Stanley’s chief U.S. equity strategist Michael Wilson said in a note.

Further energy cost increases “would destroy demand, in our view, and perhaps tip several economies into an outright recession,” Wilson stated. “This is why we still favor a more defensive, rather than growth, bias within the quality bucket where we believe earnings achievability is less vulnerable to that growth disappointment.”

According to Morgan Stanley, the correction in the stock market is still not done.

Fears of a possible Russian invasion of Ukraine were renewed on Friday when the U.S. said that Russia could launch military action in Ukraine “any day.”

“Any American in Ukraine should leave as soon as possible, and in any event in the next 24 to 48 hours,” U.S. President Joe Biden’s national security advisor Jake Sullivan said.” [Conflict] could begin during the Olympics despite a lot of speculation that it could only happen after.”

In response, stocks tumbled while gold rallied above $1,860 an ounce. On Monday, the defensive play remained the winning one as the precious metal continued to rally, rising nearly $30 on the day, with April Comex gold futures last trading at $1,870.10.

Russia has continuously denied reports that it is planning to attack Ukraine. Over the weekend, Kremlin spokesman Dmitry Peskov accused the West of “hysteria.”

“This hysteria is being intentionally whipped up,” Peskov said on Sunday. “We are being accused of some sort of unusual military activity on our territory by those who brought in their troops from across the ocean. This neither exactly logical nor exactly polite.”

The idea of a recession is starting to show up more in the analysis. Billionaire “Bond King” Jeffrey Gundlach has been on recession watch since January.

“The yield curve has us on watch already. Once you get the yield between the 10-year Treasury and 2-year Treasury inside of 50 basis points, you’re on recession watch. And that’s where we are,” Gundlach told CNBC on Friday.

In his January webcast, Gundlach mentioned the word “recession” or “recessionary” 16 times as he listed numerous warning signals to watch out for.

Gundlach believes that one of the main issues is that the Federal Reserve is well behind the curve.

“The Fed should have stopped quantitative easing not next week, not tomorrow, not yesterday, but a year ago. And what we’re seeing is the consequence of all this excessive stimulus,” he told CNBC. “We have enough recessionary potential with the flattening yield curve, and with the consumer sputtering based on sentiment, where inflation is, with the consumer not having stimulus. I think the probability of weaker economic activity later this year is pretty high.”

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