Endtimes For Fed Hawkishness And Putin’s Army Make For A Wonderful Fairy Tale: The Geopolitical — Stock Market Connection

Loud rumors of a Fed pivot are moving the markets this morning and military advances by Ukraine are silently boosting the mood yet higher. Both effects will reverse course as October unfolds, and a retest of Friday’s lows is all but guaranteed later this month. For now however another monstrous bear market rally is in the offing, as the volatility risk premium points to a much higher market over the next few days, while my technical reading of key stocks in the S&P 500 is neutral but long-term bearish. Yesterday's cross-asset action brought one positive factor for US stocks. The US yield curve is falling and in the current context that is bullish. But there was also one negative factor across global asset classes. Oil is pointing to stagflationary conditions. Expect the S&P 500 to rise over the next few days before crashing back by mid October.

Shreds of negative economic data may accumulate this month but it’s unlikely the Fed will pivot toward a lower terminal rate than what was implied last week. Rates are going higher because demand is still strong and the pass-through effects of higher wages and other costs has yet to wind down. That combined with poor earnings guidance will eventually crater stocks this month.

But another bearish factor that grows more likely by the minute is the fate of Putin and his military. With the mobilization going badly and Russian troops finding themselves encircled the likelihood of endtimes for Putin grow. Sadly this is not good for equities until a full resolution to the Russia problem is in the offing. Russia has had unpopular mobilizations backfire before and they all caused major political changes. A disaster for Putin would be good for humanity but also result in a short-term market fall as uncertainty took hold. Only when the nuclear option was taken off the table would markets would rocket higher on expectations the war would finally end and a liberal regime installed on the contingency of lifted sanctions.

Politico notes “Russian men ordered into service will train for about 15 days, hardly enough time to professionalize them. Even if it were enough, it’s unclear who Russia has left to train them. The country’s NCO and officer corps are decimated after seven months of war. And protests have sprung up in Moscow and St. Petersburg against the mobilization, leading NatSec Daily to wonder if Russia can even get 30,000 to show up for duty…A senior Finnish defense official said it would take “months” for Russia to complete its mobilization, and during that long period “there’s a huge risk of failure. War has not shown its face in the big cities, but now it will.” That’s the bad news for Putin in the short term. The bad news for the West is that the same Finnish officials say Russia will learn from its errors in Ukraine and, over time, correct them to the detriment of broader Europe. “If there’s another operation in five years’ time, they’re not going to make the same mistakes,” the official stated.”

A perfect storm of bad earnings guidance, persistent inflation driven by higher oil and gas prices and hysterical warmongering by a flailing Putin feel ever more likely in the next few weeks. Expect the markets to retest Friday’s lows and then break lower before a Santa Claus rally ensues by Winter.

My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the inverse levered ETF SPXU, all of which still nets out to a meaningful short position in equities.