The Russian invasion of Ukraine has created a mess on so many levels. War is never pretty. Whatever history calls it – be it war, an invasion, incursion, or some other yet-determined term – the Russian actions against Ukraine look a lot like war. People are certainly being affected like its war. So, for all intents and purposes, it’s war.
Putting aside most of the human aspects of this (which, admittedly, shouldn’t be something we do), the markets have also been affected by this. What started out as a seemingly detached event has proven to have much deeper ties to the global financial system.
Russia, as a major oil supplier, is being slapped with all kinds of sanctions by a large portion of the world’s governments. While it may not be bullets and bombs, the actions are serious. If Russia is ex-communicated from the global financial system the knock-on affects are difficult to determine.
Energy – and more specifically, oil prices – may go much higher. Stocks? Who knows? The Fed was already on a rate tightening campaign, with markets looking for somewhere between 6 and 7 rate hikes for the year. This invasion makes the future a lot murkier.
Since markets really hate murky, it makes for heightened volatility, and the opportunity for bears to experience some self-fulfilling prophecy. The retail marketplace seems very pessimistic about the markets at this point. While that may be a good sign, it is still a consideration in the overall sentiment of the markets.
Over the weekend S&P 500 futures once again showed wild swings, at one point suggesting the markets may fall as much as 2.5% lower this week. Presently the markets are set to open down about 1.25%.
A look at the BigFoot database shows the percent long below 40%. Both the SPX and NASDAQ have sell signals; the DJIA has a wait signal. That’s a lot of risk-off indication right there.
Of course, things typically get pretty bad before they get better. Still, there is little indication the uncertainty is abating yet. So it’s difficult to see a case where the market has priced in all this uncertainty. So volatility will likely persist for the upcoming week as the markets seek more clarity.
Volatility could mean both up-side or down-side right now. Handicapping the direction is tough business. Right now, the big round numbers seem to be what the market is watching. In the simplest terms, the S&P 500 looks to trade between 4400 and 4300. If we look a little deeper, the extreme up-side resistance is likely at the 200 day moving average (4460), and the downside… well, there isn’t much support. Keep an eye on 4280/4235 — if those support areas fail, it may be “look out below.”
The Fed is backed into a corner. However, there are lots of speeches this week. Powell testifies this week on Wednesday. If the Russia uncertainty gives a hint that tightening may occur slower than anticipated the markets could view this as a positive. If not, we’ll see.
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