Wall Street Reacts To The Chaos Sparked By “Uninvestable” Russia

Last night, Bloomberg reported Nikos Chrysoloras said that when looking at the latest market developments, he said that “We Seem To Be Tailspinning Into Chaos” a sentiment which Wall Street clearly shares and despite today’s sharp rebound from session lows (which is again driven more by positioning and technicals and which funds are selling into), global money managers say Russian markets are increasingly looking uninvestable as they grapple with the repercussions of tough sanctions.

Traders said developments over the weekend will likely drive energy prices even higher, raising the risk of stagflation in the global economy, and many were adding fresh cash to haven assets and volatility hedges.

“Russia has become not just uninvestable for new capital, but will trap legacy foreign capital parked in Russia,” said Hasnain Malik, a strategist at Tellimer in Dubai.

Others focused more on the downstream effects of the spike in market chaos: “The bigger short-term risk is liquidity driven by asset sales,” said Yogi Dewan, founder of Hassium Asset Management. “We are expecting to see a drive toward liquidity rather than a flight from broader risk short term.”

Here is a sampling of a handful of market soundbites courtesy of Bloomberg.

Stagflation Risk

“The SWIFT sanctions and the associated price rise of key imported commodities surely increases the risk of stagflation in Europe as real household incomes are squeezed further. If central banks indeed continue to feel the need to fight inflation even as it becomes more explicitly driven by supply factors rather than demand factors, we would expect further curve flattening and, potentially, even some curve inversion,” said Stefan Koopman, an economist at Rabobank.

Mulling ECB Moves

“The ECB is in rabbit-in-headlights mode. Rate hikes won’t impact inflation now. It’s out of their control unless they hike by 4-5%, which they won’t do, said Keith Temperton, trader at Forte Securities. “Impact on European earnings ex-energy will be minimal, with exposures limited to some luxury goods but less than 5% of revenues.”

Selling the Euro

GAMA Asset Management has raised some of its hedges by selling the euro following the increased sanctions by the West on Russia, said Rajeev De Mello, global macro portfolio manager. “Higher energy prices will affect European growth, and confidence will be shaken. The ECB will be slower to normalize its monetary policy than other central banks.”

Sector Positioning

“We expect a period of high volatility and higher equity risk premia. Commodity prices are the main transmission channel and the risk of supply disruptions will keep these high,” said Patrick Moonen, principal strategist of multi-asset at NN Investment Partners. “We took a more cautious view on European equities and reduced the cyclicality of our sector positioning.”

Equity Technicals

“Stagflation fears have clearly risen in the last days. However, even a slight fall in volatility would lead to a technical equity buying by option market makers and systematic strategies,” said Ulrich Urbahn, head of multi-asset strategy and research at Berenberg. “In light of positive economic signals from China, positive earnings revisions, upcoming clarity on Fed policy, pessimistic investor sentiment and low positioning, we remain cautiously optimistic – in particular for companies with pricing power.”

Long Commodities

“Seldom has the case for being long commodities been as compelling as it is now with most major commodity subgroups mired in a state of extreme shortage – the current geopolitical tensions only reinforces our structural uber-bullish commodities conviction,” said Ehsan Khoman, Head of EM Research at MUFG Bank in Dubai.

Crimea Parallel

“We are looking to replicate the trade we did when Crimea was invaded. We would look to sell Ukrainian protection in the 6-12 month range, and buy protection in the 3-5 year range and do it in a nominally equally-weighted way, so we pick up the carry, said Louis Gargour, chief investment officer at Lng Capital LLP. “We are arbitraging the disparity between short-term debt yields and long-term yields. It’s a positive carry situation.”

Opportunity in Gulf Credit

“We will look for opportunities if emerging market spreads start to widen, but for the moment we are primarily focused on value in GCC as these credits benefit from higher oil prices, prudent fiscal policy and lower requirements to issue,” said Anders Faergemann, London-based senior portfolio manager for global fixed income at PineBridge Investments.

Inflation-Linked Bonds

Mark Nash, head of fixed income alternatives at Jupiter Asset Management, is focusing on inflation-linked bonds. “We are short credit via iTraxx Crossover, which we think will widen anyway,” he said. “We have seen growth and inflation high, hikes and wider credit. If this delays tightening, inflation will rocket.”

Source: Bloomberg