Ukraine’s energy strikes and hedge fund gains reveal faultlines investors often miss. Read which sectors benefit and how Europe may respond.
London, July 8 (Reuters) – Ukraine strikes Russia where it hurts, with hedge funds holding long and short positions confirming that fundamental factors still matter, and Europe continues to underestimate its global influence.
In my midweek overview, I’ll highlight a few key stories that could have been lost amid the daily stream of market news.
PUMP NOT WORKING
In 2014, the late U.S. Senator John McCain remarked: “Russia is a gas station masquerading as a country.” If that’s true, then reports that the country’s population is currently experiencing fuel shortages look odd and at the same time potentially significant in this 4.5-year war against Ukraine.
Russia is a gas station masquerading as a country.
– John McCain
Attacks on Russia’s energy infrastructure are causing fuel shortages, rising costs, and growing public discontent, while the country is now importing fuel from India and Kazakhstan.
As expected, Russians view the economy in a more pessimistic light than in the last twenty years, according to a Gallup poll released last month.
Fuel shortages have not yet softened the threat from Russia’s military machine. A hard response to a string of Ukrainian strikes on energy infrastructure began last Thursday with one of the war’s largest bombardments of Kyiv, and another attack on the capital followed on Monday.
Will Russians’ frustration over fuel shortages speed up the end of the war, or, conversely, escalate it and raise risks for regional energy?
Although the conflict may stay on investors’ radar due to its duration, it has serious implications for European security and defense spending, as well as for global energy supplies and world oil and gas price levels.
WHEAT AND HULLS
Perhaps the market rally isn’t solely about a biased impulse or fear of missing out (FOMO). Goldman Sachs noted that hedge funds with fundamental long/short strategies posted their best quarter since they started tracking them – around an 18% return.
It’s not surprising, given that some chip sector stocks doubled in the quarter, and earnings forecasts matched the rise in stock prices. Yet not everything rose: some chip and mega-cap names finished the quarter in the red. The biggest disappointments for the second quarter were among the Magnificent Seven.
Short sellers continue to seize favorable opportunities. The famously litigious Burry raises the stakes against big AI companies and chipmakers, while other participants suspect SpaceX after its dazzling IPO last month.
In a quarter with significant moves in energy prices, rate expectations, and geopolitical challenges, bets based on fundamental data helped investors separate the wheat from the hulls. Let’s see if these players can maintain this approach in the future.
TICKED LOWER
This week the NATO summit will underscore Europe’s instability in the context of a rising geo-economy – at the intersection of economic, industrial, defense and financial priorities. In a world where alliances are wobbling, tensions between the United States and China are rising, and Europe feels pressure from both directions.
Europe faces tariff policy from the United States and intense import competition from China, while also having a significant deficit in technology and rising security risks. The NATO summit will highlight what Europe is doing for self-defense and how confident it is in the stability of the transatlantic alliance.
In an IMF Finance and Development piece, Beatriz Weder di Mauro, president of the Center for Economic Policy, emphasized that part of Europe’s problems lies in seeing itself as a “middle power,” and not fully recognizing and mobilizing its potential economic and military weight.
Values without power are fragile, she writes, adding that “many of the world’s 200 countries do not fully align with either of the two competing superpowers, so a strong “third pole” is needed, capable of demonstrating power and serving as a deterrent and stabilizing force.” She also adds that “Europe must recognize that it is large, capable, and meaningful – and act accordingly.”
– Beatriz Weder di Mauro
In sum, the author stresses that Europe should recognize its scale and capabilities to respond adequately to the global economy, energy, and security. Markets continue to watch developments in Russia, at energy facilities, and in regional security to shape their investment decisions and strategies.
Author: Mike Dolan