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Uprising in Russia could trigger sell-off in US stocks and flight to safe assets, analysts say. Here’s what investors should know.




See what happens in the next 36 hours.

That was the advice of a financial analyst as US investors awoke on Saturday to news of an armed rebellion against Moscow led by Yevgeny Prigozhin, the head of the powerful Russian mercenary organization Wagner Group.

Others speculated that the crisis in Russia could send US stocks lower, as some traders were already betting on a sell-off when markets reopened on Monday due to the sudden rise in geopolitical risk.

“Developments in Russia will ultimately indicate that President Putin’s leadership is rapidly weakening and that resources may shift away from the war with Ukraine. It is too early to say how this will affect Wall Street, but the risk of desperate measures from Putin could make some investors nervous, said Edward Moya, senior market analyst at Oanda on Saturday.

A simmering feud between Prigozhin, the leader of mercenary contractors who have fought alongside Russian military troops in Ukraine, and the Russian Defense Ministry came to a head early Saturday when Prigozhin led his troops to take over a Russian military outpost near the Ukraine border, which the military has used as his command center to oversee the war.

Amidst the mix of reliable information and unsubstantiated speculation, market analysts have been trying to make sense of the situation and what it could mean for financial markets and the global economy.

The main theme that has emerged so far is that US stocks could suffer if the military is not able to quickly quell the insurgency. Why would something that could potentially end the war in Ukraine — which has been a nightmare for markets since Russian forces invaded in February 2022 — be negative for stocks?

The answer is that chaos leads to uncertainty, which is bad for markets ̵[ads1]1; especially when it can disrupt global oil and food supplies.

“I would bet that this creates more uncertainty, which will generally be negative for risk… in the short term at least you see higher geopolitical risk premiums – in the longer term the risk is on both sides really: does this trigger the collapse of the Russian front and the war ends? Neil Wilson, market analyst at Finalto, said in a note to clients on Saturday.

Others noted that the crisis comes at a vulnerable time for U.S. markets, while Michael Antonelli, market strategist at RW Baird & Co., tweeted that the crisis “must be” bearish for U.S. stocks.

The S&P 500 index

SPX

ended its worst week since March on Friday as a series of interest rate hikes in Britain and across Europe last week sparked fresh fears of a global recession. Some analysts noted that the pullback quickly followed signs that investors are growing more bullish after a sharp rally that sent stocks to their highest level in 14 months. There are concerns that this change in sentiment could signal that stocks are finally capitulating and heading lower.

Sven Henrich, founder and chief strategist at Northman Trader, noted that the CBOE Volatility Index

VIX

,
or the so-called fear gauge, which measures the stock market’s expectations of volatility over the next 30 days, managed to end last week below 13.5, its lowest level since January 2020, even as stocks retreated.

If stocks continue to fall, it would mean new lows for the Vix have once proven to be a reliable counterindicator, suggesting investors had become too complacent before being caught off guard by a shock.

Asian markets will be the first to react to ongoing developments by EST on Sunday evening, but derivatives traders who use CME Group’s Globex platform to trade swaps that track the value of US stock indexes are already betting on a sell-off.

Meanwhile, bitcoin, an asset that trades reliably 24/7,

BTCUSD

,
is down just 0.8% to $30,675, a slight retreat after hitting its highest level in a year late last week.

Where can investors turn for safety if markets turn chaotic?

Finaltos Wilson said investors could seek shelter in the foreign exchange market, where the US dollar

DXY

,
Swiss francs

USDCHF

,
and perhaps the euro

EURUSD

and British pounds

GBPUSD

could benefit from an increase in demand. More “de-risking” could send investors into ultra-safe government bonds like US Treasurys

TMUBMUSD10Y

,
which can help to push the yield lower. Bond yields move inversely to prices.

Wilson expects that European indices may be “more susceptible to risk reduction due to makeup and proximity to Russia and the war in Ukraine. He also noted the possibility that the crisis could send the S&P 500 and Nasdaq Composite higher if investors decided to seek shelter in high-quality growth names such as Apple Inc.

AAPL

,
Nvidia Corp.

NVDA

or Microsoft Corp.

MSFT

,
which has helped to drive this year’s market rally.

Whatever happens, the outcome of the crisis should be clearer in the next 35 hours, Wilson said.

“…[H]How far the market opens after the weekend will depend on what happens in the next 36 hours … it could all be over by then, Wilson said.

Regardless, one of the first to interpret the market’s reaction on Monday will be Melbourne-based Chris Weston, head of research at online brokerage Pepperstone.

Until then, he cautioned against investors reading too much into the situation, as analysts’ visibility into a very complicated geopolitical situation is “poor”.

“The humble market participant will simply say that they have no advantage in knowing how this plays out and our visibility to read this through to the markets is currently poor – the information is often biased and it is difficult to really know what are the facts and what is fed to influence … will this lead to real regime change, fail or perhaps inflame and lead to a market shock?” Weston said in comments provided to MarketWatch.

“At this point we simply don’t know, but it feels like we’ll get enough clarity on potential outcomes and even timelines over the next 24-48 hours – at this point the outlook for a modest downside risk of Monday increased, and of course we are going to keep an eye on crude oil and the EU’s assets, he said.

Terry Haines, founder of Pangea Policy, said in an email to clients that the ongoing uncertainty fueled by the Wagner uprising exposes the fragility of the Putin regime and could marginally increase the chances of a Ukraine victory.

But Haines also admitted that it’s an “evolving and volatile situation with different facets that online add to geopolitical uncertainties, to which markets usually react negatively.” Investors must also consider that if that uprising fails, it could be “replaced by stronger Russian control” or create more instability as “Wagner disintegrates.”

Similarly, Jim Bianco, head of Bianco research, made a joke aimed at all the armchair geopolitical analysts who suddenly flocked to Twitter.

Markets may take a look at this crisis and see it as a “bullish development after some initial volatility,” Kobeissi Letters editor-in-chief and founder Adam Kobeissi told MarketWatch in comments.

“After all, the end of the war in Ukraine is the market’s biggest geopolitical driver right now, and if this increases the chances of a peace deal and/or Russia pulls out of Ukraine, it’s likely to be seen as bullish over the next few weeks,” he said .

He advised investors to keep an eye on the prices of oil and gold, which can be particularly sensitive to any developments.

“If this means more conflict, then oil

CL.1

,
bonds

TMUBMUSD10Y

and gold

GC00

is ready to gather, he said.



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