Ukraine Offers A Bright Spot For Democracy And The Equity Market: The Geopolitical — Stock Market Connection
This morning’s news of a cabinet shakeup in Ukraine is ironically bullish for democracy as it shows that even an overburdened wartime democracy can respond to public demands. And by the same token any future victories on the battlefield will help the global economy as consumers in the commodity markets find their needs met as well. For now commodities are trading higher and putting a lid on the disinflation boom the bulls are waiting for, and this likely continues until either central bankers or the Ukrainian army make definitive progress. The volatility risk premium is pointing to a range-bound market over the next few days, while my technical reading of key stocks in the S&P 500 is neutral. Yesterday's action across fixed income, currency and commodity markets signified no meaningful changes to the global macro environment. Expect the S&P 500 to be range-bound over the next few days.
One rare geopolitical trend that bodes well for equities and partially explains the unbecoming optimism fueling this bear market rally is the prospects for the Putin regime. Russian gains in Ukraine have the now-predictable consequence of moving the West to provide needed weaponry so that Ukraine can grind Russian forces down. The West is not looking for a win now, but rather a long war where Ukraine not only decimates the Russian military but Putin’s support as well, with attendant benefits to global commodity markets.
And the West has a pincer move in its economic sanctions that overtly seek to strangulate the Russian private sector. This appears is be working in the same slow manner as the war, and should Russia slowly crumble both militarily and economically that will enable regime change w/o risk volatile movements in its WMD supplies, the key issue for the self-interest of all Western nations.
Reuters notes “Russia's National Wealth Fund shrank to $148.4 billion as of January 1, down $38.1 billion in a month, as the government took out cash to plug its budget deficit, data showed on January 18. Moscow said it had spent 2.41 trillion rubles ($35.1 billion) from the NWF, a rainy day fund that accumulates oil revenues, to cover the deficit in December. Along with heavy state borrowing at domestic debt auctions, the NWF -- which was originally intended to support the pension system -- has become the main source of financing for the budget deficit since Russia invaded Ukraine last year and was hit by waves of unprecedented Western sanctions.”
Forbes notes “The recent ban on seaborn imports from Russia cost Moscow about 160 million euros per day. Two weeks before the EU sanctions and G-7 price cap on Russian crude went into force, Russia had lost 90% of its market in the bloc’s northern countries. By December 2022, Russia witnessed revenue from fossil fuel exports slump to its lowest level since the invasion in February. Its 2022 annualized inflation was almost double (11.9%) the West’s (6.5% in the US), with its total economy shrinking as its deficit balloons. ”
Key is whether Europe can hold out and send an unambiguous message to the Russian people. The warm winter may not persist nor can anyone predict what next winter will be like. And cracks in the political coalition as the right wing flexes in muscles could offer Putin an opening. But the prevailing judgment is that Europe will be fine for the foreseeable future. The Wilson Center notes “By the end of the heating season Europe can expect to retain at least 50 percent of the gas currently in storage. This almost guarantees that Europe will have enough gas to cover needs for the next two winters, reducing the risk of fuel shortages until 2025, the Russian Institute of Energy and Finance states. As a result, gas price fluctuations in 2023 may not be as severe as in 2022.”
Geopolitical trends across the globe are nearly unanimously bearish for equities, and provide the proverbial wall of worry that equities typically scale with fits and starts. Investors are betting on that historical pattern holds true in the 2020s, and a surge of Ukrainian battlefield victories and continued warm weather would add ballast to the otherwise flimsy bullish case.
Yesterday I initiated a short-term swing trade in the levered ETF UPRO as I believed the markets would rally after rallying so strongly Friday. I exited that position during the day, and consequently my current positions remain the same as yesterday morning, namely a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the ETF SPXU, all of which nets out to a large short position in equities.