Watch what happens over the next 36 hours.
That’s the advice of a financial analyst as US investors woke up on Saturday to news of an armed rebellion against Moscow led by Yevgeny Prigozhin, the head of Russia’s powerful mercenary organization Wagner Group.
Others speculated that the crisis in Russia could send U.S. stocks lower, as some traders were already betting on a sell-off once markets reopen on Monday due to the sudden increase in geopolitical risk.
“Developments in Russia will ultimately 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 tell how this will affect Wall Street, but the risk of desperate measures from Putin could make some investors nervous,” Edward Moya, senior market analyst at Oanda, said on Saturday.
A simmering feud between Prigozhin, the leader of the mercenary contractors who fought alongside Russian military troops in Ukraine, and the Russian Defense Ministry came to a head early Saturday as Prigozhin led his troops to successfully catch up with a forward -Russian military post near the Ukrainian border, which the army used as a command center to oversee the war.
Amid the mix of hard news and unfounded speculation, market analysts have scrambled to make sense of the situation and what it could mean for financial markets and the global economy.
The main theme that has emerged so far is that US stocks could suffer unless the military can quickly quell the rebellion. Why would something that could potentially end the war in Ukraine – which has been a bane for markets since the invasion of Russian forces in February 2022 – be negative for equities?
The answer is that chaos leads to uncertainty, which is anathema to markets, especially when it could disrupt global oil and food supplies.
“I would bet it would create more uncertainty, which will generally be negative for risk… in the short term, at least you see higher geopolitical risk premia – in the longer term, the risks are really on both sides: does this precipitate the collapse of the Russian front and the war end?” said Neil Wilson, chief market analyst at Finalto, in a note to clients on Saturday.
Others noted that the crisis comes at a vulnerable 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
The worst week since March came to a close on Friday, as the series of interest rate hikes in the UK and across Europe last week sparked fresh fears of a global recession. Some analysts noted that the pullback quickly followed signs that investors are growing more optimistic after a powerful rally that propelled stocks to their highest level in 14 months. Some worry that this shift in sentiment could be a sign that stocks will eventually capitulate and head lower.
Sven Henrich, founder and principal strategist of Northman Trader, noted that the CBOE Volatility Index
or the so-called Fear Gauge, which measures expectations of stock market volatility over the next 30 days, managed to end last week below 13.5, its lowest level since January 2020, even as stocks fell.
If stocks continue to slide, it would mean that new lows for the Vix have proven to be a reliable counter-indicator, suggesting that investors had become too complacent before being hit 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 following the value of US equity indices are already betting on a massive sale.
Meanwhile, bitcoin, an asset that trades reliably 24/7,
is down just 0.8% at $30,675, a slight pullback after hitting a one-year high late last week.
Who could investors turn to for protection if markets turned chaotic?
Finalto’s Wilson said investors could seek refuge in the currency market, where the U.S. dollar
and maybe the euro
and the pound sterling
could benefit from a spike in demand. More ‘risk reduction’ could send investors to ultra-safe government bonds like US Treasuries
which could contribute to lower yields. Bond yields move inversely to prices.
Wilson expects European indices to be “more exposed to risk reduction due to their composition and proximity to Russia and the war in Ukraine. He also noted the possibility that the crisis could push up the S&P 500 and the Nasdaq Composite if investors decide to take refuge in high-quality growth names like Apple Inc.
or Microsoft Corp.
which helped drive the market recovery this year.
Whatever happens, the outcome of the crisis should be clearer in the next 35 hours, Wilson said.
“…(How) 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.
Either way, one of the first to interpret Monday’s market reaction will be Melbourne-based Chris Weston, head of research at online brokerage Pepperstone.
Until then, he warned investors against reading too much of the situation, because the visibility of analysts on a very complicated geopolitical situation is “poor”.
“The humble market participant would just say they have no benefit in knowing how this is going and our visibility to read this in the markets is currently poor – the information is often biased and it’s hard to really know what is done and what is fueled influence…will it lead to real regime change, will it fail or maybe it will inflame and lead to a market shock ?” Weston said in comments provided to MarketWatch.
“At this point we just don’t know, but it looks like we have enough clarity on potential outcomes and even timelines in the next 24-48 hours – at this point the prospect of a modest decline in risk Monday is high and naturally we will be watching crude and EU assets more closely,” he said.
Terry Haines, founder of Pangea Policy, said in an email to clients that the continued uncertainty fueled by the Wagner Rebellion reveals the fragility of Putin’s regime and could slightly boost Ukraine’s chances of victory.
But Haines also conceded that it is a “developing and volatile situation with various facets which, on the net, add to geopolitical uncertainties, to which markets generally react negatively.” Investors should also consider that if this rebellion fails, it could be “replaced by stronger Russian control” or create more instability as “Wagner disintegrates.”
In a similar vein, Jim Bianco, head of Bianco research, offered a joke aimed at all the armchair geopolitical analysts who have suddenly rushed to Twitter.
Markets might take a look at this crisis and see it as a “bullish development after some initial volatility,” Kobeissi Letter editor and founder Adam Kobeissi told MarketWatch in comments.
“After all, the end of the war in Ukraine is currently the main geopolitical driver of the market and if that increases the chances of a peace agreement and/or Russia’s withdrawal from Ukraine, it will probably be seen as bullish in the market. over the next few weeks,” he said.
He recommended investors keep an eye on oil and gold prices, which could be particularly sensitive to any developments.
“If that means more conflict, then oil
are about to rally,” he said.