For much of the year, investors have been chipping away at pandemic longs and trying to normalize portfolios. That meant cutting the stay-at-home basket, selling into USD upswings, buying back EUR, cutting back CHF and JPY longs, and reducing the net long and slowing switching short in Treasuries.
The escalation in Ukraine tensions started to turn that sentiment, and in the past 24 hours, the markets have switched back to risk-off trades.One of the glaring issues for the S&P 500 is the street monetized early-year hedges in the mid to late January decline (10% drop in the S&P), but new hedges weren’t especially re-established. Hence, the market looks woefully under-protected.
It was quite the turnaround for equities on the day, with e-mini futures turning a decent gain into huge losses. It would be easy to write off the move to Russia-related noise, but the ongoing cost of living squeeze is definitely on investors’ minds.
How much is priced in??
Whenever a war headline hits or something terrible is about to happen, that is typically the question asked around global trading rooms. From my experience in both quant and voice trading, it’s impossible to answer but stating as much isn’t an option. Interday trading is just gambling, only worse, because, with most games of chance, it’s possible to quantify the odds. Not so much with geopolitical uncertainty.
But another huge problem in the market right now is the lack of position-taking at the institutional level. Instead, dealer flows are accelerants, exacerbating directional moves as dips are sold and rips are bought. Indeed, this is the opposite of the virtuous dynamic in which the same flows insulate stocks via what amounts to synthetic dip-buying and rally-selling.
Gold
The path of least resistance for gold today points towards buying on dips; however, this current eruption of geopolitical risk is severe enough to rank amongst the historical crisis events which have driven gold safe-haven demand and ultimately could take gold over the top.
Oil
At time of writing, bid on the dip, for now, seems to be the market’s modus operandi making short trades a $2.00 win at best, and in my opinion, not a great risk-reward in this market with a possible knee jerk to Brent Crude $110 if rockets fly. However, I’m sticking with selling on rallies but keeping risk on a very short leash (stops tight), and here is why.
ACCORDING TO A REPORT IN THE WASHINGTON POST, the US is contemplating additional releases from the Strategic Petroleum Reserve to cool oil prices.
Although it could drive the market lower in kneejerk fashion, recent history suggests this would have no lasting impact on oil prices. If the Biden administration is genuinely concerned about high fuel prices, there may be more discussion of a possible export ban, which would reduce domestic prices but cause prices to spike elsewhere—and the US would make no friends.
The three levers that would have a lasting impact are measures to stimulate US exploration/production (politically challenging), progress on a new nuclear deal with Iran, or de-escalation of the Russia/Ukraine situation.
However, media reports state Iran is moving more oil into tankers in preparation for a new nuclear deal and the possible lifting of sanctions. Kepler analysis reportedly shows 103Mb in tankers ready to be shipped, up 30MB since early December. Indeed, this means Iran will have no trouble adding a considerable amount to global supply even if production takes a while to ramp back up to the pre-sanctions level of ~3.8mb/d (from ~2.5mb/d average in January).
Asia Forex
Although the Bank of Korea left its policy rate unchanged at 1.25%, steep upgrades to its CPI forecasts (2022: 3.1% vs 2%; 2023: 2% vs 1.7%) indicate there are more hikes to come. The KOSPI, KTBs, and KRW are all weaker.