Russia avoids civil war, markets barely react
2023.06.26 05:29
- Armed mutiny in Russia ends peacefully, yet gold trades quietly
- Yen remains close to its recent lows despite hawkish BoJ signals
- Euro loses ground after soft business surveys, stocks drift lower
From Russia, with turbulence
An armed mutiny in Russia over the weekend concluded without any bloodshed. The Wagner group – a private mercenary army – started to march against Moscow on Saturday. This followed accusations from the group’s leader, Yevgeny Prigozhin, that the Kremlin had attacked his troops fighting in Ukraine via missile strikes.
Most of the details are not clear yet. What we do know is that the insurrection ended quickly, after the Wagner group and the Russian government struck a deal. Under this deal, Prigozhin would withdraw his soldiers in exchange for safe passage and immunity for the troops that participated in the armed uprising.
In other words, Russia narrowly avoided a coup. Geopolitical risks have clearly escalated, and yet, financial markets did not care much. The Russian ruble fell to its lowest levels since the Ukraine war started, but that was pretty much it. Oil prices traded lower in the aftermath and safe-haven assets such as gold barely advanced, unable to attract any serious defensive flows.
It seems that market participants are ignoring the mounting signs of political instability in Russia, as the worst-case scenario of a full-blown civil war has been avoided. Yet, geopolitical risks are back on the radar, which poses a risk for currencies such as the euro that are geographically exposed to Russian developments.
Hawkish BoJ signals help to lift the yen
Over in Japan, the yen has been blown to smithereens by the Bank of Japan’s refusal to tighten monetary policy. The collapse in the currency has been so severe that Tokyo has started to threaten FX intervention once again, although judging by the sharp drop in the yen’s implied volatility recently, investment managers have not taken this threat seriously.
Instead, it seems that the Bank of Japan is shifting towards a more yen-friendly stance. The latest summary of opinions from BoJ members contained some interesting revelations, such as growing disbelief that inflation will moderate back to its 2% target coupled with some hints that the central bank might adjust its yield ceiling strategy soon.
This narrative shift helped to breathe some life back into the battered yen, although the currency’s advance was not very impressive overall. Still, this sets the stage for a tightening move by the BoJ next month, as the Japanese economy remains resilient and inflationary pressures seem more persistent. Speculation about such a move could help the yen to stabilize, and perhaps even recover somewhat.
Euro gets hit by gloomy PMIs, stocks correct lower
Meanwhile, the euro sustained some damage last week, after the latest round of business surveys revealed that economic momentum in the Eurozone has vanished. The PMIs highlighted that the economy was essentially stagnant in June, with new business orders declining for the first time this year. On the bright side, inflationary pressures seem to be moderating too.
Markets are already pricing in nearly two additional rate hikes by the ECB this summer, but with economic growth rolling over and inflationary forces fading, the risk is that the central bank will underdeliver. Therefore, the euro cannot count on any more ‘fuel’ from monetary policy, and if anything, there is a risk of disappointment if the ECB falls short of what investors expect.
Finally, stock markets drifted lower on Friday in every region. It might be that the weak European business surveys raised some recession alarms or simply that risk assets corrected lower after a monster bull run this year. All told, US equity valuations have become excessive once again, and with earnings growth being stagnant, it’s difficult to see what will propel this market even higher.
