American markets today, viewed several hours before the 9:30 a.m. Eastern time opening appear mixed but promising. All three major indices are struggling in the early hours as I write this column and one or more of them could make it into positive territory before or during today’s trading. Markets, investors, governments and politicians are assessing American President Joe Biden’s State of the Union address last evening and attempting to evaluate what will happen next. A rally today could be short-lived since Russia is ramping up the intensity of its push into Ukraine and shows no signs of slowing and Russian puppet satellite Belarus appears to be entering the war. Meanwhile, Ukraine’s ability to tap capital markets for cryptocurrency and a US$270 million bond issue speak to its resolve to keep fighting. The stakes continue rising almost hourly and the risk-off tone may revive when the optimism from Biden’s address wears off.
Canadian markets are negative at time of writing but could also make it into the green before or during market opening.
European markets are open at time of writing and major indicators there are positive. For several hours the FTSE 100 was the lone positive indicator but the CAC 40 and DAX pushed up.
Amongst precious metals the safe havens of gold and silver are dropping slightly.
Amongst currencies, the Canadian dollar is up while the Euro and British pound sterling are falling against the American greenback. The pound has weakened and will continue weakening as the Ukraine situation gets worse, explains Lawrence Kaplin, Chief Market Strategist at London-based payments specialist Equals Money. Kaplin believes that with new, more powerful weapons being used and the introduction of Belarus as an active ally of Russia, the stakes have risen further, and markets have gone further risk-off dragging the pound lower.
Similarly, Germany has pledged to raise defence spending to US $100 billion a year, making it the biggest spender in Europe, and reversing a foreign policy doctrine that has been in place since WW2. “This is money that might otherwise be spent helping Europe recover from the pandemic, so it is not great news for the EU,” Kaplin says.
This follows yesterday’s session in which Russia’s invasion of Ukraine and the seeming likelihood of continued hostilities cast a risk-off tone across the markets. As investors, traders, politicians, governments and observers attempt to grasp the full implications of the conflict it appears clear that some economic costs will be incalculable on both sides. Russia's economy has taken broad-based shocks including sanctions on its banks, individual sanctions on Russians’ wealth abroad, exclusion form the SWIFT system, A record drop in the ruble, a doubling of its interest rate to 20% and closing of its stock and derivative markets.
Many costs are going being borne in the West. Jamie Dimon, chief executive office and chairman of JP Morgan warned that the sanctions on Russia’s banks could have what he called ‘unintended consequences'. In a Bloomberg interview, Dimon also warned that volatility is here to stay.
As well as BP which started the trend, the list of companies pulling out of Russia now includes HSBC and Royal Dutch Shell and others. “We cannot and we will not stand by …” Shell chief executive officer Ben van Beurden said, terming Russia’s attack a ‘senseless act of military aggression,’ according to a Reuters report. Credit Card companies Visa and Mastercard have effectively pulled out by blocking transactions within Russia on their networks. General Motors, Volvo and Volkswagen have announced that they will cease shipping to Russia and Daimler and Mercedes Benz plan to divest their stakes in Russian vehicle manufacturer Kamaz. Meanwhile in a move as serious as the SWIFT sanction, global shipper Maersk has announced that it would suspend routes to and from Russia. Companies such as Glencore have not pulled out of Russia but are reviewing their assets there. Meanwhile French oil company TotalEnergies SE and utility company Engie SA have resisted pulling out and can expect a call from French minister for the economy and finances Bruno Maire.
As well, Dimitris Melas, head of research at index provider MSCI said that removing Russian listings from its indices would be a ‘natural next step.’
While bargain hunters may be looking for buying opportunities in the market and might understandably be looking at defense stocks that sector is best left alone, according to Gavin Graham, Chief Strategy Officer at SmartBE Investments and a 35-year veteran of money management. “Northrop Grumman, L3Harris, Lockheed Martin and Raytheon are all up 8-12% this last week so most of the good news is in the price already,” he says. The rock bottom prices of Russian equities may look appetizing to those with a strong risk appetite but they are also best left alone for now. “Russian assets are really really cheap, with the ruble collapsing but until we see how the Ukraine situation works out there’s no reason to get involved now,” Graham says.
If Dimon and Graham have it right (and they likely do) we must be more careful in the market than ever.
Al Emid is a financial journalist, broadcaster and author with two books underway.
The Emid Report on Volatility 2022 – the next in the series -- is scheduled for release in Summer 2022 and his book on foreign investing is scheduled for release in January 2023.