What The Market Wants: War Drums Trump Solid Economic Numbers

Today brought three better than expected economic releases from Construction Spending, ISM Manufacturing, and Personal Income. The ISM figure was quite unexpected and Personal Income was well above expectations.  If we ignore for a moment that the Final GDP reading for Q4 was lowered on Friday (which may or may not have been primarily caused by severe weather), we have had a week of better than expected economic numbers. Corporate earnings have also continued to exceed forecasts, albeit with a bit more cautious guidance.

Of course, none of that matters when the “war drums” start beating. Russia and the Ukraine are engaged in a serious game of “chicken” with a bear in the hen house.  The Russian ruble has borne the brunt of the damage so far with a double digit drop today against many major currencies until the Russian Central bank intervened by raising interest rates from 5.5 to 7%.  That’s certainly not your usual ¼ to ½% move.

The Russian MICEX fell nearly 11% to add a serious loss in equities to the equation.  The ruble has been falling for some time against the dollar, but today it gapped down by nearly another 2% as markets closed. The ruble fell nearly the same amount against the Euro. Clearly, there are a lot of emotional dynamics exacerbating the abrupt fall of the ruble and the MICEX blue chips. Uncertainty is never appreciated by financial markets and nothing moves them faster than “war drums.” 

It would be sheer folly to try to guess the outcome of the escalating situation with Ukraine.  Who will blink first?  Keep in mind that a weakening ruble brings Russia’s chief exports oil and gas to more favorable prices.  However, Europe has countered with talk of UN sanctions and asset freezes.  And recall that Russian oil flows through Ukrainian pipelines to most of Europe. There is enough complexity here to opt for strict caution. 

Hedging with VIX derivatives paid off today.  Will it again if things escalate? Perhaps. Nothing is certain except that a falling stock market always generates bargains.  Our goal is to help you find some of those bargains and urge caution.  What will tomorrow bring?  Probably more chaotic markets.