The most significant conflict since the Cuban missile crisis

The Russian military invasion (the second after Crimea and Eastern Donbas invasion in 2014) against Ukraine began on February 24. Russian forces attacked Kyiv and other major cities early on. A saying is, "In a war, truth is its first victim." But Ukrainian forces appear to have put up an unexpectedly tough resistance and inflicted rather heavy casualties on the invading Russian forces. At the same time, Russia's military power is superior to Ukraine's. Even if Russia succeeds in taking Kyiv within a week from now to eliminate Ukraine's democratically elected leadership and installs a puppet regime, resistance in the rest of Ukraine to the Russian forces may well continue.

The Russian-Ukrainian conflict has a significant impact on the conditions for the European security order. Ultimately, Putin's power ambitions threaten the entire former Warsaw Pact bloc. Only NATO stands between him and the Baltic states (part of the former Soviet Union). So, this conflict must be judged much more severe for the U.S. and Europe than any other since the 1962 Cuban Missile Crisis.

Extensive economic sanctions

The Russian attack has resulted in relatively extensive economic sanctions from the United States and E.U. governments against Russia and its leadership. Not enough to sway Putin, some say. Then the West must stop all Russian oil and natural gas purchases and exclude Russian banks from the international Swift system, where the last topic now seems to happen. Several experts from Eastern Europe with better knowledge of Russia argue that the U.S. and NATO have proved too weak. It has encouraged Putin to go as far as he has. The Moscow Stock Exchange has taken a hit, only to recover on Friday, February 25. In addition, the Russian rouble has lost about 10% in value against the euro since just over a week ago. However, the price of the rouble does not seem very marketable. The actual rate "on the street" is probably even lower.

Moscow Stock Index last month

Commodities and oil on the rise

Commodity prices such as oil, natural gas, and wheat (Russia is a major exporter of all, while Ukraine is mainly on wheat) continue to rise. This war fuels inflation, similar to the Yom Kippur war between the Arab states and Israel in 1973, to which we will return.

The sky is the limit when it comes to the oil price, it seems. Good news for Putin, unfortunately, although Russia must probably sell their energy elsewhere than to Europe going forward.

Brent Oil price from June 16, 2021, to February 25, 2022

Brent oil, weekly five-year price graph

The DBA Future is a composite of several food items via various components (sugar, meat, grains, soybeans, cocoa, coffee, wheat, etc.). It has risen at a steady rate since mid-2021. However, it declined somewhat on Friday.

DBA Future from June 28, 2021, to February 25, 2022

How the stock market usually reacts to war

The stock market tends to have a somewhat cynical attitude towards war. The most important thing is that the war ends quickly, and the consequences are not too significant for the economy. In this case, the attacked country of Ukraine is rather large and democratic, the size of France and with some 44 million inhabitants. Not a tiny area like Kuwait in 1990 or Crimea in 2014.

Let's start with a scary example leading to recession.

We choose to start our comparison with the Yom Kippur war between September 6 and 25^th 1973, between Israel (supported by the USA) and Egypt and Syria (sponsored by other Arab countries and the Soviet Union). It was a war of revenge by Egypt and Syria, seeking to reclaim the Sinai and Golan Heights, respectively, which they had lost in the six-day war against Israel in 1967. After three weeks of fighting, there was a ceasefire between the parties. A few years later, Egypt began peace negotiations with Israel and regained the Sinai in 1979-82. For Europe and the U.S., the most significant result of this war was a sharp rise in the price of oil (as, incidentally, did gold). The high cost of oil contributed to a recession. The New York Stock Exchange fell by around 40% between October 1, 1973, and December 31, 1974.

S&P500 Index around the Yom Kippur war from January 1, 1973, to December 31, 1974

Next is the Gulf war calling for a phase of consolidation that may be ahead

The Gulf War came about quickly and unexpectedly. Hardly anyone had thought that Saddam Hussein's tanks would roll into Kuwait in August 1990, but Saddam dared. Unclear signals from the U.S. foreign minister may have contributed, plus that Saddam desperately needed to replenish the state's reserves after a very costly eight-year war with Iran. A bit like robbing a bank for a quick buck. The New York Stock Exchange fell rapidly following Iraq's invasion of Kuwait in early August 1990, by around 20 percent. Then the stock market stayed there for the roughly five months of the military build-up for the counterattack from Saudi Arabian territory. Once that counterattack started in January 1991, the war was over in days. Iraq's armed forces were utterly slaughtered, especially by a superior Allied air force.

S&P500 Index during the Gulf War July 1990 to January 1991

 Twenty percent, the rule of thumb in the case of war?

Following coordinated terrorist attacks by al-Qaeda hijacked U.S. domestic airplanes against targets in the New York and Washington D.C. areas in September 2001, the stock market dived some 20 percent. But the S&P500 index recovered most of its losses during the following months. There was also a swift military response from President Bush, with invasions by U.S. troops in Afghanistan on October 7, 2001. The Taliban regime was ousted from Kabul by the Afghan Northern Alliance supported by the U.S. air force on November 26, 2001.

S&P500 index around the time of Word Trade September 11 attacks

Due to different incidents, many minor stock market declines have occurred over the last fifty years. But then it has often been about smaller areas or bombings of U.S. embassies abroad and the like. Tragic events from a human perspective but not crucial for the world economy. Unfortunately, in this respect, the Russia-Ukraine war is more reminiscent of the Yom Kippur war than the Gulf war and the 9/11 attacks in New York. It could have consequences for our economy for a relatively long time.

What is next for S&P 500 and Nasdaq?

What is next for S&P 500? One thing is sure: the risk is still high, and the volatility may very well continue. Nevertheless, one must admit that the recovery during the last two trading days is encouraging. The next level on the upside lies around 2 450, where important MA20 meet up. A break and Fibonacci 50 is the target.

S&P 500 index graph, July 22, 2021, to February 25, 2022

MA50 is about to be broken on the upside in the weekly chart.

S&P 500, weekly five-year price graph

Nasdaq also managed to close above EMA9. The next level on the upside is Fibonacci 23.6, just above 14 400, followed by MA20, currently trading at 14 465.

Nasdaq 100 Index graph, July 22, 2021, to February 25, 2022

Nasdaq 100, weekly five-year price graph

Looking at the two indices above, one can suspect that the risk appetite is back and the worst already is discounted. Looking at Russell 2000 and HYG, they seem to confirm this:

S&P 500, HYG, and Russell 2000

Interest rates have stabilized but have not come down massively.

VIX has also come down but is still trading above MA20, confirming that the risk is far from over.

VIX, July 22, 2021, to February 25, 2022

Amazon back above MA20

The Amazon stock did manage to retake MA20, unlike the indices. Also, Amazon was not touching below lows in January as the index did, looking at the lows. Will there be enough risk appetite back in the market for MA50 at 3 165 to be tested? A break of Fibonacci 38,2 is necessary in the first place.

Amazon share price graph, July 22, 2021, to February 25, 2022

On the other hand, momentum is negative and falling in the weekly chart:

Amazon, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Strengthened USD in times of uncertainty

USD has strengthened against the euro as the geopolitical situation worsened. A nice bounce took place on Friday, also implying increased risk appetite. However, note how the USD strengthens against the euro during current trading.

EUR/USD, July 22, 2021, to February 25, 2022

EUR/USD, weekly five-year price graph

In Europe, DAX closed Friday, trading close to its intraday high. Note that there is some left for the gap from Thursday to close.

DAX index graph, July 22, 2021, to February 25, 2022

DAX, weekly five-year price graph

The same goes for OMXS30, even though the gap has not very left of it.

OMXS30 index graph, July 22, 2021, to February 25, 2022

OMXS30, weekly five-year price graph

When talking about gaps, have a look at Volvo

Some like trading gaps. Have a look at Volvo, where there is more of a gap to close than, e.g., OMXS30.

Volvo, July 22, 2021, to February 25, 2022

There is a cluster of resistance levels in the weekly chart below.

Volvo, weekly five-year price graph

The full name for abbreviations used in the previous text:

EMA 9: 9-day exponential moving average

Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers.

MA20: 20-day moving average

MA50: 50-day moving average

MA100: 100-day moving average

MACD: Moving average convergence divergence