Watch what happens over the next 36 hours.
That was the advice from one financial analyst as U.S. investors awoke on Saturday to news of an armed rebellion against Moscow led by Yevgeny Prigozhin, the leader of the powerful Russian mercenary organization Wagner Group.
Others speculated that the crisis in Russia could drive U.S. stocks lower, as some traders were already betting on a selloff once markets reopen on Monday due to the sudden increase in geopolitical risk.
“The developments in Russia are ultimately going to suggest President Putin’s leadership is weakening quickly and that resources may shift away from the war with Ukraine. It is too early to say how this will impact Wall Street, but the risk of desperate measures from Putin might make some investors nervous,” Edward Moya, Senior Market Analyst, at Oanda said Saturday.
A simmering feud between Prigozhin, the leader of mercenary contractors who have been fighting alongside Russian military troops in Ukraine, and the Russian Defense Ministry came to a head early Saturday as Prigozhin led his troops to successfully overtake a Russian military outpost near the Ukraine border, which the military has used as its command center for overseeing the war.
Amid the mixture of reliable information and unfounded speculation, market analysts have scrambled to try and make sense of the situation and what it might mean for financial markets and the global economy.
The main theme that has emerged so far is that U.S. stocks could suffer unless the military manages to quickly suppress the rebellion. Why would something that could potentially end the war in Ukraine — which has been a bugbear for markets since Russian forces invaded in February 2022 — be a negative for stocks?
The answer is that chaos leads to uncertainty, which is anathema to markets — especially when it could disrupt global oil and food supplies.
“I’d bet on this creating more uncertainty which is generally going to be negative for risk…in the short term at least you see higher geopolitical risk premia — longer term the risks are on both sides really: does this precipitate the collapse of the Russian front and the war ends?” said Neil Wilson, chief market analyst at Finalto, in a note to clients on Saturday.
Others noted that the crisis is coming at a vulnerable time for U.S. markets, while Michael Antonelli, a market strategist at R.W. Baird & Co., tweeted that crisis “has to be” bearish for U.S. stocks.
The S&P 500 index
SPX,
closed out its worst week since March on Friday as series of interest rate hikes in the U.K. and across Europe last week sparked fresh fears of a global recession. Some analysts noted that the pullback swiftly followed signs that investors are growing more bullish following a powerful rally that sent stocks to their highest level in 14 months. There are concerns that this shift in sentiment could presage stocks’ finally capitulating and heading lower.
Sven Henrich, founder and lead strategist of Northman Trader, noted that the CBOE Volatility Index
VIX,
or the so-called fear gauge, which measures of the stock market’s expectations for volatility over the next 30 days, managed to finish out last week below 13.5, its lowest level since January 2020, even as stocks pulled back.
If stocks do continue to slide, that would mean new lows for the Vix have once proved to be a reliable counter-indicator, suggesting that investors had grown too complacent before being walopped by a shock.
Asian markets will be the first to react to ongoing developments by Sunday evening Eastern time, but derivatives traders using CME Group’s Globex platform to trade swaps tracking the value of U.S. equity indexes are already betting on a selloff.
Meanwhile, bitcoin, an asset that does reliably trade 24/7,
BTCUSD,
is down just 0.8% at $30,675, a slight pullback after it reached its highest level in a year late last week.
Where might investors turn for safety if markets become chaotic?
Finalto’s Wilson said investors could seek shelter in the currency market, where the U.S. dollar
DXY,
Swiss franc
USDCHF,
and maybe the euro
EURUSD,
and British pound
GBPUSD,
could benefit from a spike in demand. More “de-risking” could send investors into ultra-safe government bonds like U.S. Treasurys
TMUBMUSD10Y,
which could help to push yields lower. Bond yields move inversely to prices.
Wilson expects European indexes could be “more exposed to de-risking due to makeup and proximity to Russia and the war in Ukraine. He also noted the possibility that the crisis could send the S&P 500 and Nasdaq Composite higher if investors decided to seek shelter in high-quality growth names like Apple Inc.
AAPL,
Nvidia Corp.
NVDA,
or Microsoft Corp.
MSFT,
which have helped to drive this year’s market rally.
Whatever happens, the outcome of the crisis should be more clear within the next 35 hours, Wilson said.
“…[H]ow the market opens after the weekend will depend on what happens in the next 36 hours….it could all be over by then,” Wilson said.
Regardless, one of the first to interpret the market’s reaction on Monday will be Melbourne-based Chris Weston, head of research at online broker Pepperstone.
Until then, he cautioned against investors reading too much into the situation, since analysts’ visibility into a very complicated geopolitical situation is “poor.”
“The humble market participant would simply say they have no edge in knowing how this plays out and our visibility to read this through to markets is currently poor — the information is often biased and it’s hard to truly know what is fact and what is fed to influence… will this lead to genuine regime change, fail or perhaps inflame and lead to a market shock?” Weston said in comments provided to MarketWatch.
“At this point we simply don’t know, but it feels like we get enough clarity on potential outcomes and even timelines in the next 24-48 hours — at this point the prospect of modest downside in risk on Monday is elevated and naturally we’ll be watching crude, and EU assets most closely,” he said.
Terry Haines, founder of Pangea Policy, said in an email to clients that the ongoing uncertainty fueled by the Wagner rebellion reveals the fragility of the Putin regime, and might marginally boost chances of a Ukraine victory.
But Haines also conceded that it’s a “developing and unstable situation with various facets that on net add to geopolitical uncertainties, to which markets usually react negatively.” Investors must also consider that should that rebellion fail, it could be “replaced by stronger Russian control,” or create more instability as “Wagner disintegrates.”
In that same vein, Jim Bianco, head of Bianco research offered up a joke aimed at all the armchair geopolitical analysts suddenly flocking to Twitter.
Markets may take a look at this crisis and view it as a “bullish development after some initial volatility, the Kobeissi Letter’s editor in chief and founder Adam Kobeissi told MarketWatch in comments.
“After all, the end of the war in Ukraine is the market’s top geopolitical driver right now and if this increases the odds of a peace agreement and/or Russia withdrawing from Ukraine, it is likely to be perceived as bullish over the next few weeks,” he said.
He recommended that investors keep an eye on prices of oil and gold, which could be particularly sensitive to any developments.
“If this means more conflict, then oil
CL.1,
bonds
TMUBMUSD10Y,
and gold
GC00,
are poised to rally,” he said.
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