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Since news stories have begun to appear about large troop movements on the Russian side of the border, the implications for financial markets of Russia’s Ukrainian invasion 2.0 need to be considered, as I do not believe this event is being properly priced by the markets. Invasion 2.0 is significantly more dangerous than invasion 1.0, which was poorly planned and incompetently executed, as both sides have hardened their positions, and the support for Ukraine from the West has been substantial.
This increased military and financial support, combined with a likely bigger Russian invading force, dramatically increases the chances of a spillover outside of Ukrainian borders, in my opinion.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
During invasion 1.0, the Russian ruble was under serious pressure due to financial sanctions imposed on the Russian federation and some flight of capital out of the country. Through capital controls and a clever scheme to pay for Russian gas in rubles, the ruble has recovered dramatically and today is trading at a stronger level than where it was before the war started nearly a year ago. The euro, which is the heaviest component of the US Dollar Index (DXY), at over 57% weighting, is below the level it was when the war started but it has recovered since October from about 95 US cents to over $1.10 last week.
If the bigger invasion 2.0 unfolds quickly, I expect fierce fighting and a high level of volatility in both euros and rubles, as there is nothing more certain than that a rapidly expanding conflict in Ukraine would be bearish for the euro and ruble. It is true that the ECB is behind the Fed, and they will try to shrink the interest rate differential with the dollar, but those are considerations for when the military situation has reached its climax and some type of solution is at hand, which right now is unknowable as to its timing.
It appears that the Russians want all of Donbass (roughly double of what they control on the map above) and some type of guarantee of unaligned status for Ukraine, which they describe as a constitutional amendment. The only way they might get this is if they get an unconditional surrender by the Ukrainians, which probably means a renewed assault on Kyiv. I think this situation has the clear potential to get very ugly very fast, which is not being priced by stocks, bonds, the volatility indexes, or commodity markets.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
During invasion 1.0, there was a surge in agricultural commodity prices keyed to the Ukrainian economy. Something similar is probably coming with invasion 2.0. It was not so much that the crop failed last year, but that there was an inability of Ukrainian ships to export grains. Since it is unknowable how invasion 2.0 would progress, a similar situation can develop again. It would appear that most fighting will be concentrated east of Kyiv, which is about half the country.
When is all this mayhem likely to erupt?
My guess is probably by the end of February, as it strikes me as unlikely for the Russians to wait for all this military equipment promised to Ukraine – the new tanks, and a Patriot missile system – to arrive. That gives markets a window of three weeks, if we use the date of invasion 1.0 (February 24, 2022) as a one-year anniversary, to begin pricing it in.
Stock markets rallied at the onset of the original hostilities in 2022, as the event came after a notable decline. Right now, they have been rallying pretty sharply, both in the U.S. and in Europe since the beginning of the year, making the start of invasion 2.0 more likely a catalyst for a sell-off.
All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Disclaimer: Please click here for important disclosures located in the “About” section of the Navellier & Associates profile that accompany this article.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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