Investors will start the week nervously sorting through the aftermath of a short-lived rebellion by the mercenary Wagner Group that’s seen leaving Russian President Vladimir Putin weakened.
“As Monday’s global markets are set to begin trading, investors are laser-focused on whether the short-lived Russia insurrection was only the beginning of a much deeper thunderbolt set to rock geopolitical, economic and market stability in the days and weeks ahead,” Greg Bassuk, chief executive officer at AXS Investments in New York, told MarketWatch on Sunday in emailed comments.
U.S. stock-index futures edged up after the start of electronic trading Sunday night, while oil rallied. Futures on the Dow Jones Industrial Average
YM00,
rose 25 points, while S&P 500 futures
ES00,
edged up 0.1% and Nasdaq-100 futures gained 0.2%.
Global stocks fell last week as interest-rate hikes by European central banks stoked recession fears. In the U.S., the S&P 500
SPX,
ended a streak of five straight weekly gains, while the Dow Jones Industrial Average
DJIA,
and Nasdaq Composite
COMP,
also pulled back.
‘Real cracks’
While a weakened Russia raises the prospects of a favorable outcome for Ukraine 16 months after Putin’s decision to invade, the potential for further internal strife in the nation with the world’s largest nuclear arsenal is less comforting, observers noted.
“This raises profound questions. It shows real cracks,” U.S. Secretary of State Antony Blinken told CBS News’ “Face the Nation” on Sunday morning.
Putin’s hold on power “certainly seems shakier than it was a few days ago,” but there remains “no clear contender to replace him, by election or coup,” said Benjamin Friedman, policy director at Defense Priorities, a foreign-policy think tank in Washington, D.C.
Nonetheless, the war in Ukraine “is weakening Russia in various ways, including by creating internal strife and dangerously discontented elites who have some power,” Friedman told MarketWatch. “The perception of Putin’s fallibility and weakness is growing and creates its own reality. That is dangerous to him. It’s hard to predict what additional power grabs and instability that could create,” he said.
‘Bloodbath’ of volatility?
AXS Investment’s Bassuk said the further turmoil “could drive a bloodbath of market volatility amid its impact on the war with Ukraine, a shifting balance among the G-8 superpowers, and the already heightened potential for a U.S. and global recession.”
Analysts have warned that an uptick in volatility may be overdue. The Cboe Volatility Index
VIX,
a measure of expected volatility in the S&P 500 over the next 30 days, last week fell to its lowest since January 2020 and ended Friday below 14. Its long-term average stands near 20. The subdued performance, which has accompanied a year-to-date rally of more than 13% for the S&P 500 index, is taken by some market watchers as a sign of complacency.
Read: Why the ‘easy money’ has been made in the stock-market rally — and what comes next
Potential ‘nonevent’
But the quick termination of the rebellion could make it more of a “nonevent” for capital markets as trading resumes, said Marc Chandler, managing director at Bannockburn Global Forex.
While conventional wisdom sees signs of Putin’s weakness, the Russian leader has often been underestimated, he said.
“The war in Ukraine is likely unaffected, and Kyiv’s counteroffense thus far seems rather muted. The risk is that the war escalates if Kyiv resorts to medium- and long-range missiles to hit Russian assets in Crimea, and possibly in Russia proper,” Chandler said.
The rebellion, led by Wagner Group chief Yevgeny Prigozhin, saw the mercenary paramilitary force take over Russia’s southern military headquarters in Rostov-on-Don amid little resistance before marching largely unchallenged toward Moscow. Putin, without mentioning him by name, accused Prigozhin of treason.
The advance halted a little more than 120 miles from the capital before Prigozhin abruptly stood down in a deal that would see him sent to Belarus and charges against him of leading an armed rebellion dropped.
As events unspooled Saturday, analysts warned that extended strife could spark a flight to quality when markets reopened into assets like U.S. Treasury bonds
TMUBMUSD10Y,
the U.S. dollar
DXY,
and other havens like the Japanese yen
USDJPY,
Swiss franc
USDCHF,
and gold
GC00,
The dollar was little changed versus major rivals in the early going Sunday evening, while gold for August delivery
GCQ23,
edged up 0.2%.
All eyes on oil
Meanwhile, commodity and financial markets have seen big swings since Russia invaded Ukraine on Feb. 24, 2022.
First and foremost, the invasion produced a global energy shock. Russia was the world’s third-largest crude producer behind the U.S. and Saudi Arabia, and a key supplier of natural gas to Western Europe.
Crude-oil futures soared in the immediate aftermath of the invasion, with the global benchmark Brent crude
BRN00,
topping out just shy of $140 a barrel in early March 2022 after closing at $94.05 on the eve of the invasion.
Natural-gas prices had also soared, and fears of shortages led to a scramble by European governments to fill storage amid apocalyptic predictions about a harsh 2022-’23 winter.
Energy prices subsequently fell back. Crude oil is trading well below levels seen ahead of the invasion. And despite waves of sanctions by European and U.S. governments and price caps aimed at limiting Moscow’s ability to fill its coffers, Russian crude supplies remain robust.
Oil prices were on the rise Sunday night, with WTI up 87 cents, or 1.3%, to trade at $70.03 a barrel, while Brent gained 91 cents, or 1.2%, to $74.76 a barrel.
August Brent crude
BRNQ23,
settled Friday at $73.85 a barrel, falling 3.6% last week. West Texas Intermediate crude for August delivery
CL00,
the U.S. benchmark, dropped 3.9% last week to end Friday at $69.16 a barrel.
Jorge Leon, senior vice president at Rystad Energy, noted that in the past 35 years, geopolitical shocks involving big oil producers have seen crude futures jump by an average of 8% in the five days after the start of the triggering event (see chart below).
Rystad Energy
A rise of that magnitude looks unlikely given how quickly the rebellion was quelled, he said.
“Given that the short-lived event this weekend in Russia appears to have ended, we do not expect to see such a significant increase in oil prices next week. We do, however, believe that the geopolitical risk amid internal instability in Russia has increased,” Leon said in emailed comments.
—Barbara Kollmeyer contributed.