I must admit, the bears are trying their best. They’ve thrown everything but the kitchen sink at the stock market: The prospect of a half-point rate hike, an inter-meeting hike, and the looming risk of an armed Russia-Ukraine conflict.
Despite all the bad news, the S&P 500 is holding above its January lows. What’s next, an asteroid from outer space?
Short-term sentiment is certainly depressed. Two (unscientific) weekend Twitter polls tell the story. Helene Meisler’s weekly poll readings show a high level bearishness.
Callum Thomas’ weekend poll tells a similar story.
How far will the Fed go?
St. Louis Fed President James Bullard appeared in a CNBC interview this morning in which he defended his views and did not walk any of hawkishness back. Over the weekend, San Franciso Fed President May Daly called for Fed actions “measured in our pace and importantly, data-dependent”. Kansas City Fed President Esther George dismissed the idea of an inter-meeting rate hike.
In response to the contradictory messages from Fed speakers, the market turned even more hawkish. Fed Funds futures are now discounting six rate hikes in 2022 for a total of 1.75%, up from five rate hikes for a total of 1.50% on Friday. Expectations for a half-point move at the March meeting remain intact.
The key question for investors is whether the Fed will push back against the notion of such a steep interest rate path and, in particular, a half-point move in March. There will be lots of Fed speakers in the coming weeks and we should get more clarity on that question.
Ukrainian offensive: Now or never
The newsflow from the Russia-Ukraine situation is chaotic and confusing. I am not a military expert and I don’t even play one on TV. However, the window for an armed conflict is closing quickly for two reasons.
Reports emerged in late January that the Russians had moved medical units near the Ukrainian border. More alarmingly, blood supplies were also being deployed to the frontlines in anticipation of possible casualties. According to the American Red Cross
, the shelf life of whole blood is 21-35 days, depending on blood type. The shelf life of red cells is up to 42 days. Frozen blood plasma is good for up to a year. Based on that report and assuming that the Russian High Command is planning for a quick two-week offensive, the window for a full attack closes in late February before their initial blood supply runs out, though undoubtedly they can get more if the conflict continues.
As well, Russian forces will have to contend with the dreaded Rasputitsa, the season when the spring thaw turns the region into mud, which dramatically slowed the German offensive from 1942 onwards as tanks got stuck and supply lines shortened. CNN
reported that the region is experiencing a mild winter and above-average temperatures.
Social media videos from several areas where Russian forces are deployed — some posted by soldiers themselves — show soft and flooded ground, and plenty of mud.
Data from Copernicus, the EU’s Earth Observation program, shows that much of eastern Europe experienced well-above-average temperatures in January. Ukraine saw temperatures between 1 to 3 degrees Celsius higher than the average of the past 30 years, one of many changes that the climate crisis has brought this region.
Copernicus also notes that in January, “eastern Europe was predominantly wetter than average” and the soil in Ukraine was wetter than normal. The combination means less frost and more mud.
For the Russian military, it’s now or never for an offensive.
The open question for investors is what has already been discounted in the market. An article in The Economist
speculated that a limited offensive to recognize and annex the breakaway regions of Donetsk and Luhansk as independent republics might be a cause for relief that a full-blown conflict did not emerge.
If Russia were to formally recognise the two self-proclaimed republics, as independent entities, or even station its troops and military infrastructure there, it would amount to something not far short of annexation, since the “republics” would be full of newly minted Russian citizens, and be unable to stand on their own feet without substantial help from Moscow.
Ukraine and the West would object loudly to the redrawing of international borders by force. But the move would also lower tensions, because the immediate excuse for an Russian invasion was always likely to be a “provocation”, allegedly by Ukraine, in Donetsk or Luhansk. Even as it protested, the government in Kyiv might therefore heave a sigh of relief, and so would the rest of the world. The danger, however, is that Russia may not stop at that.
The NY Times
reported this morning that tensions had ratcheted down a little. The path for negotiation is still open. If military action remains on hold until early March, any Russian offensive will have to take place under less than ideal conditions.
Speaking in what appeared to be a carefully scripted televised meeting with President Vladimir V. Putin of Russia, Foreign Minister Sergey V. Lavrov said that he supported continuing negotiations with the West on the “security guarantees” Russia has been demanding of the United States and NATO.
“I believe that our possibilities are far from exhausted,” Mr. Lavrov said, referring to Russia’s negotiations with the West. “I would propose continuing and intensifying them.”
Mr. Putin responded simply: “Good.”
The televised meeting was a signal that Russia might continue using the threat of an invasion of Ukraine to try to squeeze diplomatic concessions from the West, rather than resorting to immediate military action.
I interpret current conditions as constructive for risk assets, though event risk remains high. If you are short here, you need a catastrophe within the next 10 days, otherwise, you run the risk of a rip-your-face-off relief rally.