Russia And The Fed And The Week Of Uncertainties Ahead

Ukraine's concession to not join NATO has me thinking potential for a relief rally Monday, but the waters are too uncertain for me to make any meaningful decisions.

“I knew exactly what to do. But in a much more real sense I had no idea what to do.”

- Michael Scott

It’s now Monday morning, approaching the cash open for US equity markets here on the East Coast of the United States.

The “imminent” Russian invasion of Ukraine the markets sold off on 72 hours ago still remains nowhere to be seen, but scattered reports over the weekend have indicated that Russia now has 130,000 troops amassed at its border with Ukraine, up from a reported 100,000 troops last week.

Yesterday, I did a podcast laying out what we knew so far about the potential conflict, how the Fed might react as a result, and what I believe the forecast to be for equity markets in certain sectors this year.

I’ll be the first to admit when I’m clueless about where a situation is heading and, as I disclaimed many times yesterday on my podcast, I am not a geopolitical analyst. While I might not know exactly what Russia is going to do this week and how the Fed will respond, if at all, I spent much of my podcast yesterday trying to examine, at the very least, what situations could be possible.

Equity futures were lower on Monday morning on the heightened uncertainty surrounding the potential conflict. Predictions last week of Russia starting to roll their tanks into Ukraine during the Super Bowl look to have been largely incorrect, however. It appears we’re still at a holding pattern, and, since yesterday, Ukraine has come out and suggested that they may not join NATO if  it meant a de-escalation with Russia.

This is the most promising headline I’ve seen so far on Monday morning. It appears as though Ukraine - who oddly never seemed to be worried about the whole situation in the first place, as I discuss on my podcast - is willing to make concessions to stave off a conflict. Additionally, on Monday morning, it was reported that Russian lawmakers would be considering the idea of a “proposed resolution” calling for “recognition of two breakaway regions in Eastern Ukraine as independent states”.

While the longstanding effect of such a move, in terms of destabilizing the area, would have to be carefully considered and dealt with over time, it appears as though it could be a temporary “band aid” for the “imminent” invasion cries we’ve heard.

Russia seemed to respond positively to the news that Ukraine would consider not joining NATO - with the Kremlin reporting early Monday morning that a decision not to join NATO would “considerably assist “in alleviating Russia’s fears.

Layered on top of all the geopolitical uncertainties we’ll be watching this week are even more monetary policy uncertainties.

I stated on yesterday’s podcast that the Fed was already stuck between a rock and a hard place before this Russia situation. Adding the prospect of a conflict that could lead to World War III to what I already felt was a vanilla negative situation that the Fed has gotten itself into, only seemed to add more risk to market sentiment this year.

Of course, if the Russia situation de-escalates, markets will see it as a “positive” and will likely rally, despite the fact that over the course of the next few weeks or months, I still expect markets to move lower if the Fed holds course.

As I’ve noted here on my blog and as I talked about on my podcast yesterday, reversion to the mean for markets could still mean 40% or 50% downside from here, even though the market is already off all time highs.

And any other time in the recent past I would have guaranteed you that the Fed would be using the Russia/Ukraine conflict as an excuse to ease further. But with inflation at 7.5%, they just don’t have the option to. The tying of the Fed’s hands or the death of the Powell put - whatever you want to call it - has been at the center of my continued belief that we are still going to see panic to the downside in markets this year.

Trying to guess the way markets are going to go this week is a pointless exercise, because it depends on many different variables that we don’t know the outcome to. I can only try to handicap the unknown as best as possible.

What I will say is that Monday morning’s selloff in equity futures may subside - and may even lead to a relief rally on Monday - based on Ukraine’s apparent willingness to avoid joining NATO and our central bank having the impetus to at least lighten their tone, for the time being, about monetary policy. I may try a day trade on the VanEck Vectors Russia ETF (RSX) if it goes red this morning and may buy some index ETFs pre-market in anticipation of this potential outcome.

My sizing will be super small and inconsequential because I have no clear indications of how the week will pan out.

“You didn’t happen to see…anything at all?”

- Austin Powers

You can listen to my latest podcast, from Sunday night, here: