This Week Will Test the Judgement of Everyone in the Market

American and Canadian markets opened in the red this morning as investors, politicians and governments attempted to understand what Russia’s invasion of Ukraine means for equities, energy prices, and commodities and attempted to assess the impact of ever-increasing sanctions. Major European markets have been negative since opening.

Amongst precious metals – and not surprisingly – the safe havens of gold and silver have risen by US$30.30 and $0.61 respectively.

Amongst currencies, the Canadian dollar, the Euro and British pound sterling are all down against the American greenback. The pound had faltered on Friday afternoon following release of poor consumer confidence figures but lost more ground as sentiment deteriorated due to the crisis, explains Lawrence Kaplin, Chief Market Strategist at London-based payments company Equals Money. The fall continued with the move to block Russia’s access to the SWIFT system and the ongoing crisis will continue overhanging it. Meanwhile the Euro fell to fresh lows as risk sentiment deteriorated on Friday and throughout the weekend, Kaplin explains.

At the same time, the American dollar has strengthened due to safe haven inflows.

To try to make some sense of the situation, let’s check some economic conclusions that look fairly certain at this early point:

1. Inflation will increase as prices rise all the way down the chain to the gas pump but energy equities merit consideration.
2. This tragedy will increase the importance of active investing compared with passive investing.
3. Effective asset allocation was always important and this episode has heightened that.
4. The potential for a new European political order is tremendous. What that means for European equities remains to be seen.
5. History tells us that Russian President Vladimir Putin doesn’t trouble himself   much about sanctions. Earlier wars in Chechnya, Syria, Ukraine and Georgia prove the point.
6. The hundreds of thousands of refugees pouring into Ukraine’s neighboring countries will strain those economies.

There are also some economic considerations that we need more time to understand:

1. To what extent will sanctions including the removal of Russia from the SWIFT global messaging apparatus actually affect Russia’s banking system in net terms?
2. How long will markets remain in risk-off mode?
3. Will the increase in gas prices lead to an increase in shop-at-home sales?
4. To what extent will sanctions affect Western companies doing business with Russia? Can these companies withstand the shocks? These include McDonald’s, Mondelez, Exxon Mobil, Shell and others. To what extent will they follow BP’s lead and exit the Russian market? In the same general connection, Norway’s sovereign wealth fund is divesting its holdings in Russian oil companies. To what extent will other sovereign wealth funds take the same action?
5. To what extent will cryptocurrencies take some of the safe haven status traditionally enjoyed by gold?
6. Is Putin taking stock of Western anger at his moves and the unexpected amount of resistance being mounted by the Ukrainians? And if so, will that lead to a change in strategy?
7. Will the tumult cause the Federal Reserve to cut back on rate-hiking plans?
8. What will be the net impact on Europe’s recovery?

While it’s dangerous to make too many quick market judgements based on fast—changing events, the implications of some aspects of the war merit consideration between advisors and clients. Amongst them, the strong possibility of ramping up of Russian-backed cyber attacks aimed at various American and European institutions. The United States Homeland Security Department has issued a ‘shields up warning’ to businesses to defend themselves against cyber attacks.

“We have seen many cyber attacks on Ukrainian government sites and banks over the past week, with worries (that) this cyber warfare will be elevated towards Western nations,” suggests an analysis from Wedbush Securities in New York. Wedbush says that the cyber security sector is poised to surge and that these attacks add to the growth which had already been projected at 20% for the sector.

Wedbush also says that the cyber security sector is a ’pocket of strength that merits overweighting at this time’ and cites a roster of companies for consideration: Palo Alto Networks, Zscaler, Crowdstrike, Tenable, Varonis, Fortinet, Telos, Mandiant, Palantir and CyberArk.

Still, while the tumult may create some buying opportunities they have to be chosen carefully. “In its simplest terms my view is that 10% corrections should be purchased,” says Jay Nash, Senior Vice President and Portfolio Manager at National Bank Financial in London. “There is no market correction in history that shouldn’t have been bought. This doesn’t mean leveraging and betting everything. Markets can certain go down 20% (as they did in 2018) or 30% (as they did in 2020), but it’s at the 10% level that I start getting excited,’ he says while adding a caution. “If buying is ‘easy’ it’s probably the wrong timing.”

More than any week recently, this week will test the judgement of everyone in the market.

Al Emid is a financial journalist, broadcaster and author with two books underway.

The Emid Report on Volatility 2022 – the next in the series -- is scheduled for release in Summer 2022 and his book on foreign investing is scheduled for release in January 2023.