Days like Monday underscore the abject futility of attempting to trade tactically in an environment where hair-trigger algos scan headlines for actionable “ideas.”
Admittedly, blaming the machines (“Skynet,” as it were) for intraday swings is terribly clichéd, not to mention lazy. But it’s exceedingly difficult to imagine human beings not recognizing a Volodymyr Zelenskiy joke — he is, after all, a professional comedian.
At one point Monday, Zelenskiy dryly chided the world for attempting to timestamp a prospective Russian invasion. Lacking the capacity to process nuance, non-carbon-based market participants apparently took a quip about a February 16 invasion RSVP literally.
Relatedly, algos also reacted to headlines from Interfax, which said Ukraine’s law enforcement apparatus doesn’t anticipate a full-on Russian attack happening this week, or at least not on Wednesday and Thursday, the dates Zelenskiy joked about. The report cited Oleksiy Danilov, the secretary of the National Security and Defense Council, who apparently said the situation is “fully under control.”
Color me skeptical. The US ordered its Embassy in Kyiv closed Monday, citing a “dramatic acceleration” in Russia’s preparations. “We are in the process of temporarily relocating our Embassy operations in Ukraine to Lviv,” the State Department said. “The path for diplomacy remains available if Russia chooses to engage in good faith,” Antony Blinken remarked, adding that the US “look[s] forward to returning our staff to the Embassy as soon as conditions permit.”
Also, the Kremlin staged a publicity stunt featuring Sergei Lavrov “advising” Vladimir Putin to stay at the negotiating table, to which Putin responded “all right.” The spectacle was painfully contrived.
I only mention all of this because Monday’s intraday volatility (predicated as it was on war headlines) was entirely consistent with SocGen’s analysis of January’s wild swings. Recall that the intraday vol overshoot versus close-to-close vol last month was wholly anomalous. The bank’s Jitesh Kumar and Vincent Cassot suggested the disparity was attributable to the interplay between Ukraine news flow and the impact of dealer hedging, which exaggerated the price action.
“Given the sharp investor focus on the January Fed meeting, the geopolitical escalation in Ukraine flew under the radar, in our view,” they wrote, adding that according to the indicators they monitor, “the news flow around Ukraine-Russia tensions was responsible for the large gyrations in risk assets in late January.”
Fast forward to mid-February and Ukraine is most assuredly driving the price action, although Jim Bullard certainly managed to grab his share of headlines for the second time in three sessions.
Rates were also whipsawed by the Ukraine headline hockey, even as Fed speculation continues to cast a long shadow. “Even with Ukraine/Russia tension simmering in the background, the reality is that US rates are simply a function of Fed expectations at the moment,” BMO’s Ian Lyngen and Ben Jeffery wrote Monday. “Bullard’s comments did little other than affirm his preference for 100bps of rate hikes by July [and] despite geopolitical tensions, 2% 10-year yields is exerting a degree of magnetism with the confluence of macro influences leaving a (potentially brief) period of dynamic equilibrium in US rates.”
As ever, Lyngen and Jeffery’s capacity to deliver incisive takes in near real-time is impressive, especially considering the consistency.
“What are markets to do should this grim assessment prove accurate?”, Rabobank’s Michael Every wondered, weighing in on reports of imminent Russian military action. “Obviously, risk-off, tempering some of the recent surge in bond yields,” he said, answering his own question, before elaborating in a characteristically colorful missive. I’ll leave you with a few choice excerpts from Every’s piece — he’s a crowd pleaser:
The direct economic impact of a Russian attack is small provided it is not sustained, even if there would be immediate disruption to markets of the kind already seen (i.e., no commercial flights/shipping). However, sanctions would have a dramatic impact on energy, food and key metals prices — even if Russia very undiplomatically claims it “doesn’t give a ****” about whether they are imposed on it or not. An economic history paper (‘The Effect of War Risk on Managerial and Investor Behavior’) argues firms cancel IPOs or delist, and become more risk averse. Of course, if sanctions aren’t introduced — and Austria says it may block them — then the West can’t agree on even a financial penalty for invading a neighbor, let alone a military one. So how does a market trade the end of the key principle of global security — that you can’t take what you want by force — already cracked by past US and Russian actions? It won’t. But that does not mean it is right not to do so!
