Geopolitical Developments: The Eurasian Triple Threat Is Slowly Weakening By The Day, Yielding Specks Of Hope For Financial Markets

The bear market took full shape with yesterday’s bloodbath in equities and flight to safety in bonds, and while the risks of a protracted slump are high there is hope that global leaders will be forced to moderate their disastrous policies and give the global economy another chance at normalcy. The volatility risk premium points to a higher market over the next few days, but my technical reading of key stocks in the S&P 500 continues to be bearish. Yesterday's cross-asset action did bring one positive factor for US stocks. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there were also several negative factors: copper is pointing to declining global GDP expectations and many EM currencies are making new lows. Expect the S&P 500 to fall over the next few days, but with the potential for a significant bear market rally to follow.

Signs emerged yesterday that the long-awaited fall in the Russian economy was finally happening, yielding hope Putin will pull back from Ukraine or even be deposed. Though people continue to go out and spend and voice support for Putin’s war, the relative lack of military hardware in yesterday’s bogus Victory Day celebration belied the internal strains and gaps plaguing Russia. The Telegraph notes “Russia's economy has plunged into its worst crisis for almost three decades as the country is battered by Western sanctions, a leaked copy of the Kremlin's own forecasts shows…the Russian finance ministry is predicting a 12pc collapse in GDP this year, the biggest contraction since 1994 when it was shifting towards capitalism under Boris Yeltsin, the first post-Soviet president…A collapse would wipe out around a decade of economic growth…The leak will pile pressure on Vladimir Putin, who on Monday presided over a scaled-down version of Russia's annual Victory Day parade marking the end of the Second World War in Europe.”

Putin’s strategy was to have China and other vaunted “non-aligned” nations like India support his economy against Western sanctions, but the sanctions have been too deep and his supposed friends too busy with internal issues to offer fulsome support. India has too many public health and infrastructure problems to deal effectively with inflation or keep its currency stable, so it demands hefty discounts on Russian oil and may lower imports going forward. But even worse for Putin is the drop in Chinese economic activity due to Xi Jinping’s moronic zero-COVID strategy. Chinese demand has fallen and so have global commodity price despite disruption of Russian exports. Now western companies are singing a chorus of complaints against Chinese lockdowns while American tech giants are lowering guidance due to their Chinese exposure. At heart are the faulty policies of Xi Jinping, which have failed to clear an mRNA vaccine by Chinese pharma firms and stalled imports of Western-made mRNA vaccines. Since the elderly weren’t prioritized for vaccination China has a large at-risk population that needs booster shots (or worse, initial shots) of China’s “dead-virus material” vaccines. And even with boosters, there is a significant probability of mild illness, with the related social and economic effects.

As The Economist notes “The implications for China are grim. Just slightly more than 50% of the population has been boosted and, by March 17th, less than half of those aged over 70 had received a third dose, according to the country’s National Health Commission. Many old people are not vaccinated at all. China initially approved shots only for healthy people under 60, leading to concerns that they might be dangerous. With vaccines that do a poorer job of limiting infection, transmission will be high. Although the Chinese government on April 4th cleared another domestic mRNA vaccine candidate for clinical trials, these vaccines are not in arms yet. A push to get the elderly vaccinated, and those already with jabs boosted, seem the only way back to normal.”

The Fed may also take note of the faltering global economy and tone down its hawkishness. Derivatives markets have started to price in lower expected interest rates as fears of a hard landing grow. I expect volatility to continue unabated until we get some sign the Fed is capitulating to global economic reality, likely happening later this month. Until then expect lower lows and the first signs of a true bottom around 3700 on the S&P.

My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETF UPRO.