Where are the Adults in the Room?!
Shouldn’t they have planned for this imminent invasion ahead of time?
Despite what numerous armchair and recently-minted geopolitics experts tell you on social media and the news, the events unfolding in the past few days are confounding. Never in my worst nightmare would I have thought that the possibility of a nuclear world war would become a scenario that needs to be considered in my lifetime.
And yet, here we are. A Russian army at war with its nuclear forces on high alert. The EU and the US, the ones we trust to keep us safe, are responding with a hodge-podge of retaliatory sanctions which seem rushed and (at best) unclear when the US was warning everyone on social media that invasion was IMMINENT. Shouldn’t they have planned for this imminent invasion ahead of time?
What good can there be to tell a Russian President in the heat of war, with a nuclear button at his fingertips, that Germany, which was pacifist nation since the end of the WW2, is now going to ramp up military spending to more than 2% of its economic output in the years ahead?
In crazy unprecedented times like this, the certainty is that volatility will be high and moves will be sharp. Therefore, position sizing should be of utmost importance. While we can all just hope and pray that cooler heads will prevail, there are also certain irreversible trends that are now set in motion that will impact the world and the markets for years to come. Join our mailing list for a special edition of our risk call later today as well.
TRADING TIP
Wait and Recharge
There are times when markets are in a limbo with days of alternating moves where there does not seem to be a clear trend, leaving traders baffled and uncertain on what to do. As tempting as it may be to do some adjustments or even try to trade the minute movements, sometimes it’s just good to leave your positions alone to avoid unnecessary stress as long as you’re not over-invested.
Markets will start to establish the trend eventually. In fact, the past few days of news is already heartbreaking enough and your emotional well-being may have already been severely affected by it. If you are mentally drained, perhaps it is good to take some time off markets after reducing some risk.
WEEK AHEAD
The Reserve Bank of Australia is due to make their monetary policy statement this Tuesday with no change in the rates expected. The Bank of Canada will be expected to make its policy statement on Wednesday with a 0.25% interest rate hike expected.
Federal Reserve Chairman Powell testifies on Thursday and may give hints of how the current geopolitical crisis will affect the decision at the Federal Reserve meeting in March. US Non-farm Payroll (NFP) on Friday numbers will provide clues on the current US employment situation and will be a crucial data point for the Fed to consider at their meeting next month.
TRADING PLAN
1. Currencies:
Keep short USD against CNH. Stay patient.
2. Commodities: Uranium & Energy — Stay long. The trend is about to get stronger.
3. Equities:
Equity Index: Extremely volatile markets given the relentless flow of headlines regarding Russia-Ukraine situation. Stay nimble.
Single Stocks: Energy stocks in the TrackRecord Model Portfolio are poised to break even higher in the weeks ahead.
Key risks: The Ukraine situation is the main focus of markets for now.
WHAT HAPPENED YESTERDAY
- The backlash against Russia’s invasion grew stronger over the weekend as the Western Block stepped up its measures against the invasion. The US and Germany decided to provide Ukraine with armament while many countries including the bulk of the EU decided to close their airspace off from Russian aircraft. Putin has ordered Russian deterrence forces (consisting of nuclear capabilities) to be put on standby in response to the Western backlash. Representatives from Ukraine and Russia have agreed to meet at the Ukraine-Belarus border to have diplomatic talks.
- The European commission stated that they committed to ban selected Russian Banks from the SWIFT interbank messaging system on Saturday. This ban will supposedly still allow the EU to pay for Russian gas and oil for now. However, Brent and WTI crude oil futures rose as high as 7% on the news this morning. European Commission President Ursula von der Leyen, along with Poland’s president, Andrzej Duda, called for an express path for Ukraine to join the EU.
- US Headline PCE Price Index came in at 6.1% YoY (vs 5.9% expected) while Core PCE Price Index came in at 5.2% YoY (vs 5.1% expected). Inflation seems to be grinding higher and may push the Fed to choose a faster pace of rate hikes.
- The 2-yr yield and 10-yr yield rose 1 basis point to 1.55% and 1.97% respectively. The U.S. Dollar Index declined -0.54% to 96.61 as sanctions stayed still on Friday.
- S&P 500 closed +2.24% higher on Friday, the Nasdaq rose +1.53%, the Dow Jones Industrial Average climbed higher by +2.51% and the Russell 2000 rose +2.04%. The markets continued its advance higher on Friday when sanctions were not as tough as feared to be then. Stock futures (S&P 500 -2.5%, the Nasdaq -2.5% and Dow -1.7%) were down in the early hours of the Asian trading session due to the escalation of sanctions over the weekend.
- Crypto markets were down yesterday as risk aversion, arising from Putin’s call for nuclear deterrence in Russia to be put on standby, took hold of markets. Bitcoin was down -3.7%, bringing it below 38,000 while Ether fell -5.7% to 2,616.
HEADLINES & MARKET IMPACT
Putin puts nuclear deterrent on alert; West squeezes Russian economy
Notable Snippet: President Vladimir Putin put Russia’s nuclear deterrent on high alert on Sunday in the face of a barrage of Western reprisals for his war on Ukraine, which said it had repelled Russian ground forces attacking its biggest cities.
The United States said Putin was escalating the war with “dangerous rhetoric”, amid signs that the biggest assault on a European state since World War Two was not producing rapid victories, but instead generating a far-reaching and concerted Western response.
WHAT WE THINK: Putin has raised the stakes tremendously (Sources in the Ukrainian media say that after Russia announced that all nuclear forces were on standby, NATO refused to transfer heavy weapons to Kyiv). What do you do when you have nothing much left to lose? Probably go all in, and that’s what it seems is occurring in Putin’s mind now. War is a horrible thing for anyone involved, and in light of what’s happening, we would be remiss to think we are geopolitical experts concerning our opinions. The fog of war remains strong in the early days, and we will best try to provide context as this develops.
Russia faces major disruptions to oil, commodities flows without SWIFT
Notable Snippet: Russian exports of all commodities from oil and metals to grains will be severely disrupted by fresh Western sanctions, dealing a blow to Russia’s economy and hurting the West with a spike in prices and inflation, traders and analysts said.
The United States and its allies on Saturday moved to block certain Russian banks’ access to the SWIFT international payment system in further punishment to Moscow as it continues its military assault against Ukraine.
WHAT WE THINK: This will significantly impact the Russian economy, provided that China is not buying backdoor energy from Russia. We suspect this development will accelerate whatever plans Russia, China, and Iran have regarding energy deals and currency settlement schemes in the grand scheme of things. The past two years have been intense as it seems humanity is going through history in a compressed timeline.
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Nuclear, coal, LNG: ‘no taboos’ in Germany’s energy about-face
Notable Snippet: Germany signaled a U-turn in key energy policies on Sunday, floating the possibility of extending the life-spans of coal and even nuclear plants to cut dependency on Russian gas, part of a broad political rethink following Moscow’s invasion of Ukraine.
Europe’s top economy has been under pressure from other Western nations to become less dependent on Russian gas, but its plans to phase out coal-fired power plants by 2030 and to shut its nuclear power plants by end-2022 have left it with few options.
Thematic Context: “Putin is rather bold in advancing his plans in Ukraine without much regard for Western sanctions because he knows about how severe the energy situation is in the West. This is probably what is going through Putin’s mind: “Sanction me? Sure, and Europe, with just a 5% Gas stockpile left, shall freeze for the remainder of winter, and I’ll remove Russia’s energy balance from the global supply, exporting massive inflation to Western economies. And with multi-currency energy settlement now possible in Euros & Renminbi, Russia’s revenue has a backdoor solution.” — 22nd Feb 2022
“Biden’s measures against Putin were underwhelming and disappointed the “Free World”. The truth is the West still needs Russian energy because of ESG hubris and Europe cannot afford to be too aggressive in imposing sanctions against their major supplier of energy resources. The grind higher in energy will continue.” — 25th Feb 2022
WHAT WE THINK: Germany finally awakens from its ESG slumber, and we suspect many Western economies will soon follow suit. We believe that the demand for traditional energy will go on a rampage higher as Germany restructures its energy sector once again. Other countries will start to take a serious look at clean baseload power like Uranium.
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SENTIMENT
FX
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Best,
Phan Vee Leung
CIO & Founder, TrackRecord
