Markets ignore Putin’s nuclear saber rattling. Why would that change?

Vladimir Putin’s escalation of Russia’s war in the Ukraine and another round of nuclear saber rattling did not get Federal Reserve Chairman Jerome Powell out of the market spotlight on Wednesday. But investors might want to pay attention.

“The news from Russia dashed hopes of an early termination of the Russo-Ukrainian war, or of a rally” in the euro or sterling, Thierry Wizman, global rates and currency strategist at Macquarie, said in a note.

“That’s not to say that Jay Powell’s Fed isn’t important, but rather to say that what the Fed does today could become less important in a few weeks if other events come along, the War being the most prominent of the ‘known unknownsWizman said, using a term popularized by former US Defense Secretary Donald Rumsfeld.

Putin, recovering from a series of battlefield losses in Ukraine, ordered on Wednesday the partial mobilization of reservists in an escalation of the conflict. The Russian president also said that Russia will use “all the instruments proposed to it to counter a threat against its territorial integrity; This is not a hoax.”

Watch: Putin’s comment on “all instruments” is perceived as a nuclear threat as Russia mobilizes some 300,000 reservists

The comments, accompanied by a plan to annex a large part of Ukraine’s territory, were perceived as a nuclear threat. Hours later, US President Joe Biden criticized the military escalation and Putin’s statements in a speech before the UN General Assembly In New York.

“Just today, President Putin has launched open nuclear threats against Europe, in a reckless disregard for the responsibilities of the non-proliferation regime. Now Russia is calling in more soldiers to join the fight, and the Kremlin is staging fake referendums to try to annex parts of Ukraine, an extremely significant violation of the UN charter,” Biden said.

Putin’s comments sparked a knee jerk in markets, with European oil, grain and natural gas futures jumping. The US dollar and Treasuries saw some safe-haven-related buying, pushing yields lower, but investors did not shy away from risky assets, with US stocks posting modest gains as attention turned to largely on an afternoon Federal Reserve decision that is expected to generate another 75 basis. point, or 0.75 percentage point, increase in the fed funds rate and hints at the scope of further rate hikes.

Watch: 4 things to keep in mind when the Fed delivers its decision to raise interest rates

The Dow Jones Industrial Average DJIA,
-1.70%
rose 103 points, or 0.3%, while the S&P 500 SPX,
-1.71%
gained 0.5%. Oil futures gave up early gains, with the US benchmark CL.1,
-0.39%
It was down 0.4% near $83.56 a barrel, while November Brent crude BRN00,
+0.19%

BRNX22,
+0.19%,
the global benchmark, fell 0.2% to trade near $90.40 a barrel.

“The most depressing aspect of this verbal escalation is that the truce talks, which seemed to have a flicker of life yesterday, now seem doubtful in the short term, which means that a war is more likely during the winter, with everything that implies power shortages in Western Europe,” Greg Valliere, chief US policy strategist at AGF Investments, said in a note.

Read: Putin’s Partial Draft Announcement Appears To Trigger Scramble To Get Out Of Russia As Flights Fill Up

The call-up of 300,000 potential reservists would mark the largest mobilization of Russian troops since World War II “and almost guarantees that there will be no short-term off-ramp to the military conflict, which has already left thousands dead and is proving ruinous. economic costs in Europe,” Helima Croft, head of global commodity strategy at RBC Capital Markets, said in a note.

The move underscores nervousness among administration officials that Russia’s setbacks in Ukraine could lead an increasingly desperate Putin to seek an increasingly dangerous escalation of the conflict, Croft said.

Many market participants, by contrast, seemed eager to “fade out” the war story and look beyond Europe’s upcoming winter energy crisis, Croft said.

Related: The situation has deteriorated. Deutsche Bank forecasts a deeper recession in Europe amid war-triggered energy crisis

“Some have suggested that Putin may have already played most of his cards by cutting off gas supplies to Europe and that his strategy of economic militarization will produce diminishing returns in the future given the relatively robust levels of gas storage and the success from countries like Germany in building LNG infrastructure,” Croft said.

Instead, he argued, things were likely to get worse, potentially creating a “multi-winter emergency.”

“At a minimum, we believe that if he is willing to order a potentially unpopular troop mobilization, he would not hesitate to cut oil exports to Europe before the EU sanctions start date of December 5,” Croft said.

Important questions surround the Western answer.

“The United States and its allies continue to claim that the catalyst for a formal military intervention would be a Russian attack on a NATO country. To date, there has been no definitive statement on whether a tactical nuclear attack or a nuclear contamination emergency caused by the deliberate bombing of a facility, such as the Zaporizhzhya reactor, would be a red line that would provoke a Western military response,” he said. Croft. she wrote.

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