Geopolitical Developments: An Unholy Marriage Between A Hawkish Fed and Hawkish Vladimir Putin Is Turning Equities Lower

The failure of American Democrats to do anything meaningfully different from Trump in foreign policy is now playing to the advantage of Putin, helping send equities lower on fears of both cyber/military conflict and rising interest rates/diminishing liquidity. Still the volatility risk premium points to a higher market over the next few days, while my technical reading of key stocks in the S&P 500 is bullish. Yesterday's cross-asset action brought several positive factors for US stocks. Copper's chart is signifying global growth. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there were also several negative factors across global asset classes. Gold is signalling inflation fears. Oil is pointing to stagflationary conditions. Expect the S&P 500 to be range-bound over the next few days.

The tension between Russia-Ukraine has clear foundations in US-Europe disunity, as I noted last Friday, but points to another failure of US foreign policy in making a clear ally of India. Not only is India key to turning the ASEAN region firmly against Chinese dominance, but the same for turning Afghanistan and by extension the muslim Central Asian nations that Russia regards as its sphere of influence. Central Asia is important to both Russia and China and for the West to break the alliance of these two autocratic behemoths it must create discord in that region, with India and Turkey being the western-oriented nations to do the job. Turkey is lost due to the increasingly anti-western leadership of Erdogan, but India is in grasp as both Democrats like Obama and Republicans like Trump showed when they courted PM Narendra Modi. But the US has failed to mobilize the significant Indian-American population to get India to implement strong liberal capitalistic policies simply because both parties focus on myriad other leftist and rightist policies that have no prospect of fruition in a centrist nation like America. Now the opportunity to move India is in abeyance as Modi deals with the Omicron variant.

ING notes re India and Omicron COVID that “…despite being one of the world’s largest producers of vaccines, India’s vaccine rollout has been quite slow relative to many of its APAC neighbours. Even now, only just over 60% of the population has had any vaccination, with just 44% fully vaccinated... What potentially compounds the modest vaccination rates, is the almost total reliance on traditional vaccines such as Covaxin and Covishield – essentially the AstraZeneca vaccine. Whilst these have been shown to be effective at protecting against the original Covid and subsequent variants, mRNA vaccines seem to have stronger protective properties against Omicron (and even then, heavily reduced). So India joins Indonesia and perhaps the Philippines in the region as being potentially at greater risk from an outbreak of Omicron than other countries in Asia-Pacific in terms of both the likely rate of spread and the severity of symptoms.”

So Putin will play the US against Europe and likely secure some diplomatic wins in return for maintaining the status quo. This will restore market confidence in the status quo and help push the S&P back near its old highs, but does nothing to alter the trajectory of conflict between the West and Eurasia.

My current market positions include a large cash position, and the following holdings: Amgen (AMGN), American Express (AXP), Goldman Sachs (GS), Johnson & Johnson (JNJ), 3M (MMM), Starbucks (SBUX), Titan Machinery (TITN) and a long position in the S&P 500 (via the levered ETF UPRO).