The war in Ukraine has taken a turn for the better for Ukraine as it has taken back about one thousand square miles of territory and an important city in the East. It is also making gains in West near the city Kherson as it slowly degrades Russian defenses and makes gradual gains. So, why are we talking about market risks if war in Ukraine gets worse? The concern voiced by many is that Putin will counter Ukrainian gains by sending more troops and/or resorting to tactical nuclear weapons, biological weapons, or chemical weapons. What is the likelihood that Putin will double down in response to Ukraine’s gains and how will markets react?
Will Putin Continue His War Despite Global Opposition?
Vladimir Putin has managed to isolate himself and Russia because of his war in Ukraine. In a recent meeting with the leader of China Putin admitted to Chinese “concerns” and in a meeting with the leader of India the Indian leader said today not the time for war with so many pressing global problems. The leader of Turkey who has maintained open communication with Putin despite furnishing Ukraine with very effect drones has consistently said (to Putin) that Russia needs to give back all occupied land including Crimea which it occupied eight years ago. If everyone is lucky global opposition to Putin’s war will win out. On the other hand staunch nationalists in Russia are becoming more and more critical of Putin for not pressing harder for conquest of all Ukraine.
Does Putin Dare Pull Out of Ukraine?
Putin has very effectively kept widespread opposition to his war under control. He is supported by ultra-nationalists and much of the potential opposition has either left the country or is in jail. However, Putin is a student of Russian and Soviet history. He certainly recalls how an endless stream of Russian boys coming home from Brezhnev’s occupation of Afghanistan helped topple the USSR. That is why he has tried to keep the war as remote from the average person as possible. If he pulls out, he loses support of the ultra-nationalists and the average citizen starts to see him as a looser instead of a strong leader.
What Happens if Putin Uses Nukes, Chemicals, or Biologicals?
It should be noted that prevailing winds in Ukraine blow from the East and South. Thus, radiation from a nuclear strike would blow north to Belarus and West to Poland, Hungary, German and Scandinavia. Even if radiation from a tactical (small) nuclear device does not spread beyond the target area use of such a weapon would be a game changer. Biden has promised a significant response although he has not specified what it might be. The underlying concern of NATO has been not to get directly involved in a land, sea, and air war with Russia despite moving arms and personnel to the East and now adding Finland and Sweden to NATO’s ranks. Most recently Putin addressed the Russian people in a video blaming the West for their support of Ukraine and issuing a veiled threat to use nuclear weapons. It appears that he intends to hold bogus referendums in occupied territories and then say they are part of Russia which would allow him to say that he is defending Mother Russia instead of invading a neighboring country. The more he moves from threats to actions the greater the risk of direct confrontation between Russia and NATO with devastating consequences for all involved and especially the markets.
Risk to Markets of the War in Ukraine
The Fed is jacking up interest rates in a belated attempt to stem inflation. They are probably too late and we are likely heading into a recession. However, it is possible that Powell and friends will chicken out when unemployment starts to go up. On one hand we would see the market plunge as the country enters a u-shaped recession and on the other, we would see the return of easy money and a soaring market. At Top Gun Options we as Americans would like to see the Fed successfully walk the tightrope, Russia to go home and quit bothering Ukraine, China to quit threatening Taiwan, etc., etc., etc. However, the best case scenario is not likely to happen. Thus, options traders will need to dog fight and will best trade with support. An excellent course of action in the current trading environment would be to join one of the trading squadrons at Top Gun Options where we potentially print money no matter which way the market is going.