During the past 3 weeks, since the beginning of the fears of a Russian invasion on Ukraine to actual war now, you have seen a shift in the mood from possible supply shortages if there is a war to pricing in a supply shortage for the next several months in crude oil, natural gas, metals, and grains. The supply shortage coming from Ukraine unable to harvest and export grains is natural, and will be there until the war is over and Russian troops leave. That is why the move higher in wheat looks much more sustainable than the move higher in energy.
The supply shortage coming from Russia due to embargoes and sanctions is artificial, and can be circumvented through exporting to non-sanctioning countries such as China and India, when possible (crude oil), although for natural gas exports, there isn't the infrastructure to export it to China or Asia through pipelines or as LNG.
There is an assumption that Russia won't be able to export most of their normal 5-6 M barrels/day of oil due to Western sanctions. But Russia still has the capability to export it, although at a steep discount to non-embargo countries. Since crude oil is fungible, in that case, there is no supply disruption, as China/India will be substituting non-Russia crude imports with cheaper Russia crude imports. The US can make warnings all they want about China buying Russia commodity exports, but they can't do anything about it, and it actually helps the White House, because China importing Russian crude helps to keep crude oil prices from getting completely out of control.
As for European natural gas supply coming from Russia, it looks clear that Europe can't take the pain of not importing Russian nat gas, no matter how bad it looks politically. Because it will be even worse when natural gas prices go so high that it requires demand destruction from high prices, which is a politically painful way to match supply with demand. That's why Germany has refused to put an embargo Russian natural gas.
There is now a consensus belief that there will be an extended global crude oil shortage, and a European natural gas shortage. But that's assuming an extended, drawn out war between Russia and Ukraine, and no deal between Ukraine and Russia. Those are questionable assumptions because Russia has taken control of most of the south, and is steadily advancing towards Kiev, and with their artillery firepower and Putin being committed to taking over Kiev barring a peace deal where his demands are met.
If Putin takes over Kiev, the war is effectively over. If he makes a deal with Zelensky, the war is over. The likelihood of one of those things happening within the next 30 days is much greater than 50%, IMO. The war coverage is clearly biased for the Ukraine side, just from people wanting to root for good vs evil. But the reality is that US/EU are not interested in going to war with Russia over Ukraine, and without their direct military help, Ukraine is massively overpowered and will be overwhelmed by Russian forces. Its a matter of when, not if.
Zelensky is starting to waver on his firm stance of refusing to compromise on certain issues when negotiating with Putin. He may be seeing the writing on the wall, and is between a rock and a hard place. If he acts rationally, he would accept the deal from Putin and remain in power, give up trying to get into NATO/EU, although with the dark cloud of Putin hanging over Ukraine, but not directly taking over. Taking the deal from Putin is not a get out jail free card, it's basically just kicking the Russian can, but he's buying time and avoiding regime change. If he decides to keep fighting, eventually he'll lose to Putin, get taken out dead or alive, leading to more destruction and a humanitarian disaster from artillery fire in the coming weeks and months.
Stating the obvious, the Fed and ECB are not what's keeping this market down. Investors are reducing equity exposure because of the uncertainties of futures sanctions and second order effects of effectively shutting off a big part of Russian trade out of the global economy and explosive moves higher in commodities, fearing that tips the economy towards a possible recession.
If we get a resolution to this war, the market will go much higher than current levels, given how much hedge funds have taken down net equity exposure, and how much fear there is in the market. This level of fear is not sustainable for long. Its not an equilibrium situation, because eventually those that wanted/had to sell have already sold.
Still long, and nursing losses, but I just don't see a big economic impact from high commodity prices that many believe. Spending on fuel and wheat is just not a big part of consumer spending in the US/EU. And the extra money that they do spend just gets recycled to commodity exporters who will have more money to buy financial assets.
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7 comments:
They might be giving the russians a bloody nose here and there but it's ukraine that is being levelled. It seems that zelensky is almost ready to sacrifice ukraines infrastructure and population at this point to spite putin whilst making fancy speeches for as you said the reality of the situation does not favour ukraine the longer this goes on. It's not like they are fighting a war of annihilation (soviet vs nazis). Concede on some legitimate russian grievances and the country that had the mongols, napoleon and the nazis maul them will be content to not keep pummeling ukraine.
Anyways managed to get some small longs going at 4150 - seemed low. Are you still expecting a rally up to 4700+? Do you think we may carry on the correction after that by revisting the lows or even start to look at sub 4000 or this is it until later this year?
I actually think a rally back to 4700+ is more likely to happen than not over the next 6 months, as crazy as that sounds now. A lot of this sellofff has been emotional from knvestors, they are pricing in the worst from the war and Fed tightening. I expect neither in both cases.
End of the world trade that is what it is if you think its nuclear war do you go short? No because then what happens to your money does not matter this is why going long makes sense here everything is short everything is playing short it only takes the retail to finally bail out and go short that will mark the turning point because pro do not short stocks with going short they using long term options in the money which are too expensive for retail to play with.
Putin does not care about stocks but he wont play this war for too long because its just not sustainable he wont use the draft the military is professionals sooner or later its Ukraine that will not be able to sustain this war and they will make some kind of agreement give it one more week
Agree, the war is not sustainable for long. Already seeing signs that Zelensky is softening his stance, he's stuck between rock and a hard place. And Putin wants to exit with some gains that he can brag about, with a peace deal, while also giving him a way to get sanctions removed.
Owl in Ukraine it's crop planting time now.Means grains won't be planted.Means this problem will get worst.Food inflation is a big deal politically(agree w you re effects on businesses is limited).BUT food inflation means VOTES.Which means Fed will stay hawkish because Biden will keep the pressure on Powell.
Saw somewhere but couldn't retrieve the source which talked about the huge impact oil has on lower income earners(which let's face it is a large part of the US)...These people are voters and are Biden's constituency.The same would be the case with food.
Also have you considered the possibility that the war at the margin is keeping the Fed at bay and that once it's over they will be stuck with a bigger inflation problem than when we started and therefore likely to stay hawkish?In a way the war is the new FED put.
Re oil even if they do a clean switch ie.Russia exports to China/India and so neutral you are still left with sticky backwardation and very low inventories.That does not magically go away with that export switch.I think oil stays firmer for longer.
IMO only thing stopping mkt going down is positioning is just not right.Some small rally to 4500 might just do the trick.
Joseph Faggianelli
Hi Joseph, you bring up some good political points. Short term, the war uncertainty will keep Powell from becoming too hawkish, and when its over, agree, he will return to more aggressive tightening. But during that window when the war uncertainties end and the aggressive tightening fears begin, there should be about a 1-2 month time frame where underinvested fund managers will buy stocks and could take the SPX up quite a bit. I agree, long term, this market looks horrible.
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