Are they going to war? What do the markets say?
1. US has been bombarding the media about Russia's invasion into Ukraine. The Russian spokesperson sarcastically said that they should publish the schedule for the full year so she could plan her leave.
2. The information war is already happening. Each side is trying to feed information to shape the narrative of the situation and it is difficult to know what is actually going on. Be skeptical of what you read.
3. Since the media can't give us a good answer, let's refer to the markets and see if there are any clues. The efficient market and the price action traders believe the markets would have priced in all the available information.
4. The starting date would be 10 Nov 2021 where the Russians started to amass troops near the border.
5. The prices of affected securities should make big moves if war is eminent. First, defence stocks. It is intuitive that defence companies are getting more revenue as ammunition get expended and damaged equipment get replaced.
6. Second, oil and gas. This is because Russia is a major oil exporter, about 12% of the global market share. Any conflict would result in supply problems as well as sanctions that prevent other countries from buying the oil.
7. Third, Ukrainian and Russian stock indices. The fear of war would spread to the markets and cause stocks to be sold down in the conflict countries.
8. Fourth, Ukrainian currency Hryvnia (UAH) and Russian Ruble (RUB). Similar to the previous point, currencies from the conflict countries would weaken as investors sell them for other currencies or assets.
9. Fifth, Ukrainian and Russian government bonds. Conflict creates uncertainties and the bonds are not as secure as before. War may mean the government no longer exists in the future. Investors would dump these bonds.
10. Here are the performances since 10 Nov 2021:
- $United States Oil Fund(USO)$Crude Oil +13%
- Ukraine stock index PFTS -1% (not liquid)
- $iShares U.S. Aerospace & Defense ETF(ITA)$iShares US Aerospace & Defense ETF (ITA) -3%
- Ukranian Hryvnia (UAHUSD) -8%
- Russian Ruble (RUBUSD) -8%
- Ukraine 6y Bond -10%
- Russia 10Y Bond -11%
- $VanEck Russia ETF(RSX)$VanEck Russia ETF (RSX) -23%
11. The market is telling us that Russia is likely to enter Ukraine. The selldown of assets in the two countries have already begun - from stocks to currencies and bonds. Capital flight is happening.
12. The next thing the market says is that Russia and Ukraine conflict are going to be contained within themselves as US defense stocks have gone down instead of up. It would likely be sanctions at best.
13. Of course the markets are dynamic and all these could change in a whim. But sometimes the markets offer a better clarity than the propagandistic media.
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