Markets

Why I Am Rooting Against My Financial Interests This Morning

One trait evident in freely traded financial markets is that they are largely rational, and they react to news in a cold-hearted way based on only one criterion: financial implications. In many ways, that is as it should be. Logical rationality is usually a good thing, a respite from the frequently illogical, emotional responses to events prompted by 24-hour news coverage and the barrage of uninformed opinion that comes from social media. Sometimes, however, it leads to a cold-hearted, calculating response that is hard to swallow and that forces us to think of things beyond our financial wellbeing. This morning is one of those times

After hearing last night that Vladimir Putin had ordered Russian troops into separatist controlled parts of Eastern Ukraine, I awoke this morning anticipating a big negative print of index futures in the premarket. I am sure many of you did the same but, as I write, that isn’t what has transpired. Instead, after moving quite significantly lower overnight, futures for the three major indices have all bounced back to the point where they are indicating an opening that is still lower, but quite close to Friday’s close. Presumably there is some degree of “sell the rumor, buy the fact” to that, but it could be that the market is also reassessing the actual economic impact of Russia’s moves, or, more accurately, of the response to them.

ES minis chart

That response has, to this point, been decidedly mixed.

The U.K. wasted no time and imposed sanctions immediately based on their categorization of the troop movement as an invasion. For some reason, they seem to be the only country of any significance so far that views Russian troops entering Ukraine as that. Germany has reacted by putting the Nordstream 2 pipeline project on hold but, other than that, there have been no consequences. The others, including the U.S., presumably believe Putin when he says that this is a “peacekeeping” force, or at least aren’t prepared to say that it isn’t.

The problem is that if the response to Russian aggression remains limited or becomes divergent, it will only embolden Putin. There is a risk that "peacekeeping" forces will gradually move westwards and will be a fully-fledged occupation before some countries even recognize it as an invasion.

From the point of view of Ukrainian sovereignty and the Ukrainian people, that would be a disaster but, from a cynical market perspective, it is one of the better outcomes. It means that the disruption will be kept to a minimum and the world can continue with an almost uninterrupted supply of commodities from Russia. Even the U.K. response so far hasn’t endangered that. They have focused on banking and financial measures that will hit Russia’s oligarchs in the pocketbook, but it is reasonable to assume that after months of buildup to this moment, Putin’s buddies have had time to protect what they deem important from sanctions that they knew were coming.

It could be that Vladimir Putin is still playing a game, relying on the lack of desire for a swift, unanimous response to squeeze concessions out of back-channel negotiations without committing to an invasion that nobody could see as anything else. If that is the way things play out, though, a strong reaction now from Western nations is essential.

The narrowly focused response with the minimum of economic disruption and the lack of response that we have seen from the U.S. and others is probably why futures have reacted so little, but it increases the risk of a terrible outcome to this situation. That is an outcome that we have seen before, and which never ends well: a proxy war. If Russia continues to couch its invasion as assistance to rebels, then the U.S. and its Western allies will presumably offer assistance to Ukrainian national forces. Based on past experience, that will lead to a drawn-out, simmering, but bloody conflict, where each side offers just enough help to prolong the fighting, but not enough for their side to "win." That would obviously have terrible humanitarian consequences and that is too high a price to pay for a muted market reaction.

So, I find myself rooting against my own financial interests here. Like most people, I have an interest in the market other than from a trading perspective. I have long-term holdings in retirement accounts that my future depends on, and yet I am hoping that over the next day or two, the U.S., all of Europe, and maybe even China, can recognize this as an invasion and impose massive, crippling sanctions on Russia. That would hurt my portfolio, but it would disabuse Putin of the notion that he can stealthily invade Ukraine without consequences and would also create something -- the ending of those sanctions -- that can be offered in negotiations in return for his withdrawing troops.

In the short-term that will cost investors money, but money isn’t the point at this stage. The point is to stand up to someone who thinks he can invade a sovereign nation and impose his will on the rest of the world.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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