Geopolitical Developments: Contagion Both Financial And Geopolitical Looms As The Markets Myopically Rally Until Later This Week
The news for Ukraine by extension the whole world will progressive from one horror to the next and that spells some hurt for global investors. The volatility risk premium points to a higher market over the next few days (though volume may be light since the VRP could easily reverse and catch investors offside), but my technical reading of key stocks in the S&P 500 is neutral. 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 were also several negative factors across global asset classes. Gold is trading as a risk-off asset. Oil is pointing to stagflationary conditions. Inflation expectations are rising based on measures of Treasuries and TIPS. Expect the S&P 500 to rise modestly over the next few days before starting a volatile ride to lower lows.
The geopolitical and financial fallout from the continued Russian aggression is manyfold. Turkey’s potential for hurting Russia’s military and trade opportunities via the Bosphorus is profound and clearly Erdogan is trying to build support for him to do so. The prospects for NATO to suddenly take Syria seriously again is also in play since Turkey is a NATO member and already conducting operations there. This article by Brookings notes the possibility of Ukraine being just the start of a geopolitical domino.
https://www.brookings.edu/blog/order-from-chaos/2022/02/25/around-the-halls-implications-of-russias-invasion-of-ukraine/
The fact that Russian interests in Syria collide with Israel is another reason for the US and other close friends of Israel to get re-involved in Syria, as Haaretz explains:
https://www.haaretz.com/israel-news/.premium-after-ukraine-officials-fear-putin-will-move-to-curb-israel-s-syria-operations-1.10635064
What is immediately troubling for global investors is the prospect of financial contagion, as cutting Russia off from the western economy has ripple effects on western banks with exposure to Russian counterparties. ING notes that dollar shortages could appear and threaten another Lehman moment:
https://think.ing.com/articles/fx-daily-sanctions-bite-dollar-liquidity-in-focus/
Against these ugly scenarios is the prospect for Putin to be taken out by his generals or intelligence services. For many reasons these conservative interests may do so, not least because the wealth of Russia is at stake. As Vanity Fair notes, there is increasing pressure on cosmopolitan Russian oligarchs to speak out and try to stop the bloodshed:
https://www.vanityfair.com/news/2022/02/russian-oligarchs-start-to-speak-out-as-putin-brings-the-economy-to-the-brink-of-ruin
Most likely the invasion continues until Russia sees some progress and then pauses for negotiations. That is clearly not a market-friendly scenario and I continue to see lower lows once the rally that began yesterday afternoon fizzles by the middle of this week.
My current positions include a sizable cash position, Amgen (AMGN), Goldman Sachs (GS), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETF UPRO.