A Geo-politics Shock, What are the Spillovers?
Of course, I am not a geo-political strategist, but I do want to offer a few ways I am thinking about this conflict in a market sense. Obviously this is one of the more blatant geo-political escalations we have seen in a long time and it is also one of the most significant weaponization of financial markets of all time. While the domino effects may take some time to fully present themselves, they could be extremely significant in a market sense. This is a really big macro event, the question is how it plays out? And within this question there are really two sub questions which operate on two different time horizons:
Outside of Russia, to what extent does this shock impact the current global central bank trajectory of raising interest rates. This shock will only add pressure on the price side of central bank mandates, the question is how will central bankers weigh price risks vs. outlook risks into this huge unknown? The near term question.
The structural shifts in financial system will be significant, but many of them will take longer to play out. A G20 nuclear state who happens to be a marginal commodity producer had their President and central bank sanctioned and were cut off from the global payments system. In one weekend the West/NATO countries basically created a financial crisis in Russia. In terms of reserve assets, this will likely prove to be paradigm shift and the question is, what is the new reserve asset paradigm and who/what benefits? The longer term question.