Vladimir Putin’s disgraceful invasion of Ukraine is an event that many thought could not happen, and most of us think should not happen. It is an affront to the rules of the international order, democracy itself and the right to self-determination of the Ukrainian people.
The attack comes upon the back of weeks of steadily rising tension and serial lies from the Russian side. For markets it has, together with concerns over inflation, contributed to marked risk-off climate in markets with the major indices now in or close to a bear market. Russian assets have suffered dramatically, the value of its stock market has nearly halved and the rouble has collapsed. Other emerging market assets such as the Turkish lira, have also weakened notably.
Within markets, with stress levels now rising, the questions is whether markets are bottoming are now primed for a rebound once stress lifts.
A range of indicators points to very stretched levels – numerous ‘fear/greed’ or risk appetite indices are now into ‘fear’ or risk averse territory, from where markets have previously staged a rebound.
In the options markets, investors are also very cautiously positioned in terms of the ration of put buying to call activity, and broadly most sentiment indicators are now close to historic lows.
What is so far absent is a sharp moment of capitulation that would lead to panic selling and a dramatic spike in volatility. It is grim to try to think of the kind of event in Ukraine that might provoke this, and it may well be that despite the crisis, central banks stick to their plans to tighten liquidity and that this proves the ‘last straw’
In my view such a buying opportunity may come with the S&P 500 index testing levels close to 4000, down some 15% from the end of December. Until then, investors may wish to be patient before buying the ‘dip’.