It starts with the financial isolation of what was less than a decade ago a G-8 country. Where does it stop? Does it end? It depends on the behavior on the battlefield. Russia, as an aggressor, in launching an unprovoked war against its neighbour, has increasingly and just as aggressively, economically, withdrawn from global participation.
Increasingly severe sanctions are added to the sanctions already imposed. The Russian central bank is almost defenseless. A number of Russian banks were only able to move rubles. A number of Russian leaders, as well as the country’s wealthiest people, saw paper wealth evaporate within days. This nation, Russia, enjoyed the eleventh largest economy in the world (nominal GDP) in 2021. Today is March 1st. In two months. By the end of the month, will Russia even be one of the top twenty economies?
How will the extraction of all things Russian from global participation impact the global economy? Where is the risk of complexity? What are the counterparty risks, and on which markets far from obvious? Will there be a greater good than “the Lehman Brothers moment”? Guess that’s a story only time can tell? How long? Spin the wheel. Probably not that much.
What we do know is that at least in this case, the sanctions have been more punitive than deterrent…and punitive they will be.
Cracks appear in the sidewalk as children, who hopefully are unaware that bombs from their own country are landing in a country not too far away, play silly games.
The central bank of Russia was forced on Monday to raise its key rate to 20% against 9.5%. Russia’s largest foreign bond ($7 billion due 2047) has lost more than half its value. Listing on the Moscow Stock Exchange has been suspended. This market will also not open on Tuesday.
Images are appearing in the mass media of long queues at banks in Russian cities as citizens attempt to withdraw rubles worth far less than they were days earlier. Russian President Vladimir Putin has tried to halt the rapid disintegration of his economy, preventing Russians from transferring foreign currency abroad or repaying foreign currency loans made outside Russian borders. Consequently, people are turning to cryptocurrencies such as Bitcoin to facilitate capital flight from Russia, driving up the values of said cryptos in the process.
On the ground
Five days after the start of this invasion, it became clear that Putin had underestimated the fight and the determination of the Ukrainian armed forces and the Ukrainian people. Clearly, there is a will to retain independence in this country and Russian forces are seen as anything but liberating. Putin, equally obviously, seems to have overstated the support for his ill-planned operation at home and in the capabilities of an army that seems almost disinterested in playing games outside.
Five days after the start of this operation, Russia has not taken and held any major Ukrainian cities or major military objectives. Despite numerous reports of Ukrainian forces giving much more than they get on the battlefield, there are also reports of Russian vehicles running out of gas, Russian soldiers demanding food from locals and of captured Russian soldiers claiming they had no idea they were in Ukraine or even at war.
If true, it’s a sign that enlisted personnel in the Russian military are still deprived of the use of cards as they were during the Cold War. Only a nation that fears mass desertion would deprive the common soldier of the means of land navigation. On Monday, as Russian forces had apparently been forced to slow down, due both to fierce resistance and their own logistical inefficiencies, artillery and rocket attacks appeared to be intensifying in Kharkiv, the second largest city in Ukraine when it was fully populated. Civilian casualties are known to have increased.
On Tuesday, as these missile attacks on Kharkiv continue, a military convoy stretching some 27 km is moving to encircle the capital Kiev. According to intelligence reports, the Russian armed forces as of Monday had only put between 50% and 75% of their chess pieces on the board and were preparing to add assets to areas of engagement. Sanctions and an embarrassing military performance in the first five days of this invasion do not seem enough to force a rethink of Soviet, I mean Russian, intent. Despite holding peace talks on the Ukrainian-Belarusian border on Monday, the Russian military is stepping up its aggression.
Two months past
After aggressively rallying from Thursday-Friday intraday lows, US markets posted a mixed performance on Monday. The S&P 500 fell 3.14% in February, after falling 5.26% in January. The broadest of the large-cap U.S. stock indexes has painted the red band for four of the past six months.
Gold, silver and other precious metals, along with cryptocurrencies, attracted safe haven supply, rising alongside the US dollar, a sign of acute crisis-level demand, likely coming from Eastern Europe. US Treasuries also benefited from this type of support. The US 10-year note paid as much as 2% on Friday, as low as 1.81% Monday night and just 1.77% as I write this article. Same story for the US 2-Year Note as that yield fell from over 1.62% on Friday to 1.42% overnight to just 1.36% as I type.
Overall trading volume soared on Monday from Friday and rivaled Thursday’s numbers. Reversals will do this and in doing so will make price discovery and capital allocation harder to interpret. The losers beat the winners on the NYSE by about 9 to 8, with rising volume taking 44.7% of the composite. Winners beat losers on Nasdaq with the narrowest margins, but the increase in volume took a 61.2% share of total Nasdaq-listed trading volume. For the names making up the S&P 500, Monday was the heaviest trading day since Dec. 17. For the stocks that make up the Nasdaq Composite, Monday was the second-heaviest trading day in February, ahead of last Thursday.
Just a FYI
According to data provided by Kaiko (which I found on Bloomberg News), Bitcoin trading volumes using the Russian ruble hit their highest level since May, while Bitcoin trading volumes using the Ukrainian hryvnia hit their highest level since October.
That said, let’s get back to the question that was asked of me.
Obviously the $409 pivot I gave you for NOC on Thursday has been triggered. Stocks have just entered short-term technical overbought territory. You are not mistaken if you take profits here. It would make you a trader.
When it comes to national security, I’m an investor. I gave you a target price of $490, and I meant it. I am not withdrawing any NOC at this time.
This LMT chart is more developed than the NOC chart. For LMT, the $378 pivot resulting from a double-bottom reversal had been triggered long before the Russian boots had set foot on Ukrainian soil. The invasion only hastened the escape.
Here too, I have a higher price target ($465). I am not making any sales on behalf of my defense contractor at this time.
Economy (all Eastern times)
08:55 – Red Book (weekly): Last 14.5% y/y.
09:45 – Markit manufacturing PMI (Feb-Fri): Flashed 57.5.
10:00 a.m. – ISM manufacturing index (February): Expected 58.0, Last 57.6.
10:00 a.m. – Construction expenses (January): Expected 0.2% m/m, Latest 0.2% m/m.
4:30 p.m. – API oil inventories (weekly): Last +5.983M.
The Fed (all Eastern times)
2:00 p.m. – Speaker: Atlanta Close. fed. Raphael Bostic.