‘Too Complex To Follow’

Traders were “treated” to more conflicting Ukraine headlines on Wednesday, as global equities attempted to sustain a bid.

Asian shares rose on the heels of Wall Street’s Tuesday relief rally, but risk sentiment faltered anew after NATO’s Jens Stoltenberg said the alliance hasn’t seen “any deescalation on the ground.” “On the contrary, it appears Russia continues their military buildup,” he remarked.

Stoltenberg’s comments came a day after a hodgepodge of Russian officials, including Vladimir Putin, said some troops were returning to bases after completing what the Kremlin is still calling “drills” and “exercises.” Western officials were dubious, to put it nicely. But just as hair-trigger algos were quick to cut risk on Monday in response to what they didn’t recognize as a wry joke from Volodymyr Zelenskiy, “efficient” markets were more than willing to accept Kremlin claims of troop drawdowns on Tuesday. Fast forward to Wednesday and nobody knows quite what to think.

For his part, Stoltenberg stated the obvious: Moving people and tanks around doesn’t really mean much. Russia “always moved forces back and forth,” he said.

The Kremlin was quick to call him a liar. Dmitry Peskov branded Stoltenberg’s assessment inaccurate, and said Putin is “tired” of hearing about sanctions tied to an invasion Russia continues to insist was never under consideration in the first place. Peskov said he doubts Western “hysteria” has “reached its culmination,” and was keen to push back on the notion that Russia’s formidable hacker legions were responsible for Tuesday’s DDoS attacks on Ukrainian defense websites. “[We] had nothing to do” with it, he said. (And yes, that’s a direct quote.)

Mocking manic markets, Rabobank’s Michael Every wrote that “cliff edges don’t move even if you do.” “They run for miles, and not in a straight line,” he added, on the way to summarizing the dizzying array of related stories traders would need to parse in order to act rationally:

While Putin was saying he didn’t want war and offering secure gas via Nordstream 2, and collaboration on green energy(!), to Chancellor Scholz of Germany, the Russian Duma voted to forward him the option to recognize the Russian-backed ‘Donbas republics’ of Luhansk and Donetsk. Such a decision would partition Ukraine and make Russia responsible for protecting the two new ‘states’ – which Putin declared are suffering “genocide” from Kyiv. Local journalists already reported a major bomb plot was foiled there, and local military forces are being stepped up to maximum readiness. Putin can now offer to trade the Donbas for ‘Minsk’: if Kyiv does not Finlandize itself, he can carve it up, and offer a Russian narrative of being the victim. He can even do this while mocking the US reports of a Russian invasion set for today by deliberately playing around with any timetable he might (or might not) have had.

There’s (far) too much nuance in all of this to interest what few carbon-based lifeforms still exist on Wall Street’s trading desks, so the price action is mostly just keyword-based buying, selling and reactive (“dynamic”) hedging.

“The whole situation had the feel of contrived stagecraft, but the financial markets embraced it anyway,” JonesTrading’s Mike O’Rourke wrote, of Monday and Tuesday’s theater. “Overall, the two-day move would appear appropriate if one could believe the news developments,” he went on to say, before noting that “the problem is that the respective political leaders are projecting radically different images [with] the US and the UK convey[ing] grave concern, while Russia and Ukraine have expressed attitudes that border on nonchalant.” O’Rourke called that juxtaposition “hard to comprehend.”

As noted here, the Kremlin’s contention that Western intelligence agencies are sowing “hysteria” is meant as criticism, but as Putin very well knows, it’s strategic. The whole point is to create as much hyperbolic press as possible so as to make it more difficult for Russia to move ahead. At this point, it’s not clear how the Kremlin would go about explaining an invasion after spending every, single day for five weeks loudly refuting intelligence reports and insisting that no such plans were ever afoot.

On the other hand, if there was no threat (or if the threat was negligible) it’s not obvious what incentive the US and the UK would have to perpetuate a panic. Joe Biden and Boris Johnson have enough problems without having to manufacture and maintain a charade, and it’s not obvious (at all) how either leader could benefit domestically from fabricating the threat of a Russian invasion in Ukraine, a country the vast majority of Americans couldn’t even spell, let alone identify on an unlabeled map. Nobody with a “Lets Go Brandon” bumper sticker is going to rally around Biden “because Ukraine.” That’s absurd. And neither do any such voters care about NATO.

As for markets, Rabobank’s Every (correctly) suggested investors “find geopolitics too complex to follow and too disruptive to risk-on-and-wait-for-central-banks-to-save-us trading strategies.” And Pepperstone’s Chris Weston wrote that “I’m not sure anyone truly knows what’s going on.”

Don’t expect anyone to take a break from attempting to trade the unknowable, though. If the situation does deteriorate meaningfully, algos and humans alike will probably just throw in the towel for a few days. “In my experience, geopolitical tail events often just cause a correlated move down,” Amy Wu Silverman, a derivatives strategist at RBC, said.

Maybe that wouldn’t be the worst thing. US equities could arguably use a quick, cathartic purge to the extent it would bring index multiples down to more reasonable levels ahead of Fed liftoff. Remember: Only once in history has the Fed started a hiking cycle with index-level P/Es this high.