Watch what happens over the next 36 hours.
That was the advice of a financial analyst as US investors woke up on Saturday to news of an armed insurgency against Moscow led by Yevgeny Prigozhin, leader of Russia’s powerful mercenary organization Wagner Group.
Others speculated that the crisis in Russia could push US stocks lower as some traders had already bet on a sell-off after markets reopened on Monday amid a surge in geopolitical risk.
Ultimately, developments in Russia suggest that President Putin’s leadership is rapidly weakening and that resources may be diverted from the war with Ukraine. It’s too early to say how this will affect Wall Street, but the risk of desperate measures by Putin may make some investors nervous,” Edward Moya, senior market analyst at Oanda, said on Saturday.
A simmering feud between Prigozhin, the leader of the mercenaries who have fought alongside Russian military troops in Ukraine, and the Russian Defense Ministry came to a head early on Saturday when Prigozhin successfully tricked his troops into attacking a Russian military outpost near the border with Ukraine to overtake. which the military used as a command center for overseeing the war.
Amid the mix of reliable information and unfounded speculation, market analysts have struggled to understand the situation and its potential impact on financial markets and the global economy.
The main theme that has surfaced so far is that US stocks could suffer if the military fails to quickly quell the insurgency. Why should something that could potentially end the war in Ukraine – which has been a specter of markets since Russian forces invaded February 2022 – negatively impact equities?
The answer is that chaos breeds uncertainty, which is anathema to markets – especially when it could disrupt global oil and food supplies.
“I would bet that this will lead to more uncertainty, which will have a negative impact on risk in general … in the short term at least you see higher geopolitical risk premia – in the longer term there are indeed risks on both sides: will this lead to 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 pointed out that the crisis comes at a difficult time for US markets, while Michael Antonelli, market strategist at RW Baird & Co., tweeted that the crisis must be “bearish” for US stocks.
The S&P 500 index
SPX closed its worst week since March on Friday as a string of rate hikes in the UK and across Europe last week sparked fresh fears of a global recession. Some analysts noted that the decline quickly followed signs that investors were becoming more optimistic after a sharp rally that took stocks to their highest levels in 14 months. There are concerns that this change in sentiment could herald an eventual capitulation and downtrend in stocks.
Sven Henrich, founder and chief strategist at Northman Trader, noted that the CBOE Volatility Index VIX, the so-called fear gauge that gauges stock market volatility expectations over the next 30 days, managed to finish below 13.5 last week lowest since January 2020, although shares declined.
Should stocks continue to fall, it would mean that fresh lows on the Vix have once proved a reliable counter-indicator, suggesting that investors had grown too complacent before being hit by a shock.
Asian markets will be the first to react to the latest developments Sunday night Eastern time, but derivatives traders, who use CME Group’s Globex platform to trade swaps that track the value of US stock indexes, are already betting for a sell-off.
Meanwhile, an asset that trades reliably 24/7, BTCUSD, is down just 0.8% to $30,675, a slight drop after hitting a year-high late last week.
Where might investors seek safety when markets turn chaotic?
Finalto’s Wilson said investors could seek protection in the forex market, where US dollar DXY, Swiss franc USDCHF and perhaps euro EURUSD and British pound GBPUSD could benefit from a surge in demand. More “de-risking” could push investors into highly safe government bonds like US Treasuries TMUBMUSD10Y, which could help lower yields. Bond yields move inversely with prices.
Wilson reckons that European indices “may be more exposed to de-risking due to the composition and proximity to Russia and the war in Ukraine.” He also pointed to the possibility that the crisis could hurt the S&P 500 and Nasdaq Composite in could soar if investors decided to take refuge in quality growth stocks like Apple Inc. AAPL, Nvidia Corp. NVDA or Microsoft Corp. MSFT to look for those who helped boost this year’s market rally.
Whatever happens, the outcome of the crisis should be clearer within the next 35 hours, Wilson said.
“…[H]”How the market opens after the weekend depends on what happens in the next 36 hours…it could all be over by then,” Wilson said.
Regardless, Melbourne-based Chris Weston, head of research at online broker Pepperstone, will be among the first to interpret Monday’s market reaction.
Until then, he warned against investors reading too much into the situation as analysts’ insight into a very complicated geopolitical situation is “poor”.
“The humble market participant would simply say that they have no head start when it comes to knowing how this is playing out and that our visibility of reading this through to the markets is poor at this time – the information is often biased and it’s hard “To really know what facts are and what they are for.” Impact…will this lead to real regime change, failure, or perhaps market shock?” Weston told MarketWatch in comments.
“At this point we just don’t know, but it feels like we’re going to get enough clarity on potential outcomes and even timelines over the next 24 to 48 hours – at which point the prospect of a slight decline in the Risks increased on Monday, and of course it is.” “We will be watching crude oil and EU assets closely,” he said.
Terry Haines, founder of Pangea Policy, said in an email to clients that the ongoing uncertainty fueled by the Wagner uprising reveals the fragility of the Putin regime and could slightly increase the chances of a Ukraine victory.
But Haines also acknowledged that it is an “evolving and unstable situation with multiple facets that collectively contribute to geopolitical uncertainties to which markets typically react negatively.” Investors also need to consider that if this uprising fails, it could be “replaced by stronger Russian control” or lead to more instability if “Wagner falls apart.”
Along the same lines, Jim Bianco, head of Bianco research, brought up a joke aimed at all the geopolitical analysts who suddenly flocked to Twitter.
Markets may take one look at this crisis and see it as “a bullish development after initial volatility,” Kobeissi Letter editor-in-chief and founder Adam Kobeissi told MarketWatch in his comments.
“Finally, the end of the war in Ukraine is the market’s key geopolitical driver right now, and if that increases the likelihood of a peace deal and/or a Russian withdrawal from Ukraine, that’s likely to be perceived as bullish over the next few weeks,” he said .
He advised investors to keep an eye on oil and gold prices as these could be particularly sensitive to developments.
“If this leads to more conflicts, oil CL.1, bond TMUBMUSD10Y and gold GC00 are set for a rebound,” he said.