It’s early Sunday morning here in the United States, and as I start the process of this Column, on the other side of the world the Closing Ceremony of the 2022 Winter Olympics in Beijing, China is taking place. Returning to comments I made prior to the Olympics, as Russia’s President Putin and China’s President Xi held private meetings, it was possible a deal had been struck for Russia to not invade Ukraine until the Games were completed. This means the leash has been dropped by China and Russia could now “cry ‘Havoc!’ and let slip the dogs of war.”[i]

I’ve been reading stories from a number of updates from a variety of news sources (avoiding the extremes of media sources), and this weekend has seen a number of developments. First, Russia did some nuclear drills Saturday, an unsettling thought at any time but doubly so given the current situation. Additionally, Russian military exercises in Belarus that were scheduled to end Sunday did not conclude, with Western sources reporting Russia has actually added to its buildup a mere few hours from the Ukraine capital Kyiv. As I talked about in last week’s Column, with an occupying force in Belarus as part of an estimated 190,000 troops surrounding Ukraine, the staunch authoritarian (I do not view him as a Communist) Mr. Putin is aggressively pursuing his unstated goal to “Make Russia Great Again”.

As you may know from my previous writings, I am neither a Republican nor a Democrat. I choose to weigh each candidate, election, and political situation on its own merits. What measure do I use? Similar to when I talk about fundamentals being the deciding factor in long-term market behavior[ii], I look at things as realistically as possible and ignore the imaginary and make-believe. With that measure in mind, I give US President Biden high marks, at least for now, in his handling of Russia’s aggression. First, his administration worked to build a unified front with European allies in regard to economic sanctions, a successful mission given only Germany remains on the fence. Then Mr. Biden, as well as the allied European leaders (e.g. Johnson, Macron, etc.), began attacking from a defensive position by calling out Mr. Putin personally for being less than truthful about the situation, telling the world what US intelligence had uncovered concerning Mr. Putin’s plans. This same tactic was then used by a number of European leaders, the effect being no element of surprise if/when Russia makes its next move. In essence this has boxed Mr. Putin into a corner, for if/when Russia invades Ukraine the world will know it was the plan all along. However, Mr. Biden also provided a way out for Mr. Putin through diplomacy. By leaving this opportunity, Mr. Putin can go on with his “it’s only military drills” mantra and at least in his own eyes save face amidst what could be crippling economic sanctions from the West.

Unfortunately, Ukraine is a pawn in this old-style Cold War game. Ukraine President Zelensky has asked for sanctions from the West to be imposed on Russia now rather than after an invasion has begun. So far, the Biden administration and its allies have held off on making this move, the equivalent of keeping its queen covered until absolutely necessary. Why? My analysis tells me this is part of leaving the door open for Mr. Putin to pull back. If pre-emptive sanctions were put in place, the Kremlin could view it as an invitation to move ahead anyway if the punishment is already in place. This is why I compare it to not moving one’s queen too early in chess. If the attacking player stays overly aggressive, getting out of position, unleash the queen to do maximum damage. Does this sacrifice Ukrainians caught in the initial stages of an invasion? Again, unfortunately yes. I wish it weren’t so, but the world doesn’t turn on hopes and wishes. Reality, and history, tells us otherwise. Ultimately this part of the game comes down to Mr. Putin’s decisions.

Before I touch on markets, I want to make one last political point. Regardless of what Mr. Putin’s next move turns out to be, in my opinion it is good to see the United States taking the position as the leader of the western world once again. It’s an important job, and unlike “reality” television it has real-world consequences.

Let me repeat a couple recommendations I frequently make: 1) Read Anne Applebaum’s books “Twilight of Democracy” and “Red Famine”, and 2) If you are on the social media site Twitter, follow both Ms. Applebaum (@anneapplebaum) and Garry Kasparov (@Kasparov63, who also happens to have a number of books on the subject of Russia).

As for markets, the US is making its way through a 3-day holiday weekend meaning most don’t open until late Monday afternoon or evening. Last Friday showed traders to be concerned, and rightfully so, for as the old saying goes investors don’t like uncertainty and this long holiday weekend was filled with nothing but unknown variables. A quick check of safe-haven markets shows the US dollar index had rallied for the week, though interestingly enough had settled near mid-range. Based on technical analysis of the USDX weekly chart, and the latest intermediate-term reading of the in-house algorithm on the euro, the USDX looks like it should start to weaken again (euro strengthen).

Another key market is crude oil, with the spot-month contract collapsing late last week from a high of $95.82 to a low of $89.03, establishing a number of short-term and intermediate-term technical signals along the way. This included a key bearish reversal on the market’s weekly chart, a usually reliable pattern indicating an intermediate-term top has been established.

And then there’s Chicago (SRW) wheat. Recall from previous discussions that Ukraine and Russia combined account for 30% of global wheat exports. An invasion would likely throw the world wheat market into more chaos than it usually operates in, putting the spotlight squarely on the largest wheat futures market – Chicago. Here we see nothing but uncertainty, with the more active May contract sitting between resistance at its previous 4-week high and support at its previous 4-week low, waiting for a breakout. Meanwhile, the most recent CFTC Commitments of Traders report (legacy, futures only) showed noncommercial traders adding to their net-short futures position the week ending Tuesday, February 15.

Taking these three markets together, traders were indicating at the end of last week that a diplomatic solution to the situation in Ukraine was expected. Certainly that could change, and if the violence starts to grow beyond what is already being reported, then these key markets (as well as gold and corn) will reflect new expectations.

Until next time,

Darin Newsom

[i] From Act 3, Scene 1, of William Shakespeare’s play, “Julius Caesar”. No, I did not know this right off hand. I had to look it up.

[ii] Newsom’s Market Rule #6: Fundamentals win in the end.