Penta Strategies 2022 February

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Penta Strategies 2022 February

Dear friends

Just when we were hoping things would improve, we experienced another month of wild swings.

While the U.S. economy saw robust job growth despite Omicron, the Consumer Price Index (CPI) rose to 7.5%, a 40-year high. The question of how much the Federal Reserve would have to raise interest rates in March to restore stability to prices also increased uncertainty and volatility in the markets.

We saw wild moves in major stocks with spectacular gains by Alphabet, the parent company of Google, while Meta, the parent company of Facebook, experienced the worst one-day drop in value of any company in history: Meta fell more than 26%, losing $230 billion in market value! Meanwhile, Exxon Mobil, the largest U.S. oil company, delivered its best earnings report in seven years, riding on a wave of rising energy prices.

Then, on February 24, Russian President Putin announced the start of a “special military operation” in Ukraine. What was unthinkable to most of the world became the biggest geopolitical eruption since World War II: a full-blown military conflict on the border of the European Union. Moscow’s forces used heavy shelling, air and ground fighting to try to take the capital Kiev.

But as Russian troops advanced in the Ukraine, they encountered much more resistance than expected. The Ukrainians defended their country fiercely, and after President Zelensky asked the world for support, the United States and Europe deployed the most effective nonmilitary weapon they have: Russian assets totaling over $1 trillion were frozen, and Russia was cut off from the international SWIFT payment system.

As a result, the ruble fell to a record low, although the Russian central bank tried to support it by raising interest rates to 20%.

Both the stock and crypto markets reacted with increased volatility to the constant media reports about the developments in Ukraine and the retaliatory sanctions.

Again it was a month with many ups and downs with S&P 500 ending at -3.1%, MSCI World Index ‑2.7%, 20-year bonds -1.6% and gold 6.1%

Our strategies did comparatively well with Universal ending at 1.0%, Progressive -0.1%, while CryptoMax could not fully resist market dynamics ending at -3.9%.

Russia is the world’s third-largest energy-producing country after the United States and Saudi Arabia. Russia and Ukraine also supply nearly a third of the world’s traded wheat. In metals, Russia is the second largest exporter of aluminum and the largest producer of palladium.  As a result, sanctions against Russia have naturally fueled fears that supplies of key commodities would suffer.

While in the U.S. only about 1% of corporate revenues depend directly on Russia and Ukraine, the EU is in a more difficult position: Russia is its largest trading partner, and more than half of Russia’s oil and gas supplies go to Europe. Punishing and sanctioning Russia for its invasion of the Ukraine is impossible without also hurting its own economy. 

As the world is turning away from doing business with Russia, China may emerge stronger. Russian oil and gas that has been going to Europe could end up in China at a discount. And as Putin is forced to turn away from the dollar and the euro, a void is created for the Chinese renminbi as a trading currency in the region.

We are in a period of great uncertainty, and this is clearly reflected in all markets. The high volatility and high short-term correlation between asset classes continue to require a very risk-aware and disciplined approach.

In the past, geopolitical events have usually had a relatively short-term impact on markets. However, a hot conflict on the border with Europe is unprecedented. We all hope and pray that this war and the suffering will end as soon as possible.

Stay happy, healthy and wealthy!

Omar

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