Ukraine invasion: risk of nuclear conflict rises, but markets don’t seem to care
- Following Russia’s invasion of Ukraine, a nuclear conflict between global powers seems more likely now than it has since the Cold War
- The financial world seems to barely notice, though, with a lack of any meaningful negative response in asset markets
But that is not the only real risk. There is also the threat of the conflict going nuclear.
Even in this “contained conventional conflict” scenario, the scarcity of fossil fuels, the loss of export markets and occasional cyberattacks will add to the stagflationary impact of the spike in commodity prices in Europe. Globally, medium- and long-term potential output will suffer, owing to the new bifurcation between a China- and Russia-centred trading and financial system and one with the US, Europe and Japan as its hubs.
Even if a wider conflict remained conventional, it would result in a regional human and economic calamity. The risk of a nuclear confrontation – with the use of both tactical and strategic nuclear weapons – would be higher than at any other point since the Cold War. Every Nato member state’s territory and citizenry would be at existential risk.
So far, Nato has rejected calls for a no-fly zone. It has also shown restraint in response to Putin’s nuclear sabre-rattling. On February 27, Putin put Russia’s nuclear forces on high alert in response to Western sanctions and what he referred to as “aggressive statements” from Nato powers.
In addition, rationality might be in short supply where it matters most. Some observers have questioned whether Putin remains fully competent, speculating that his isolation during the pandemic has added to his paranoia.
Doomsday Clock moves closest to midnight in 73-year history
This assessment is driven mainly by nuclear risks, climate change and disruptive technologies. The once-a-year setting of the clock took place this year on January 20. Had it occurred instead on March 1, the clock would no doubt have been moved closer to midnight.
The impact of the Cuban missile crisis on US stock markets was minor. There was about a 7 per cent drop in the S&P 500, most of which was recovered when Soviet leader Nikita Khrushchev gave in. The Able Archer incident did not become public knowledge until 2015, so markets cannot be blamed for not responding.
Today, there is scant evidence that markets have even noticed the rising risk of a nuclear conflict. Denial is the name of the game.