Few Are Talking About A Real And Present Danger For Markets

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Summary

Lots of hot spots in the world right now pit the U.S. and Russia against each other.

Cyber warfare raises the temperature.

Is Russia preparing for war?

Commodity and other asset prices are likely to react to a heightening of tensions with Russia.

Volatility ahead- Some Ominous Signs.

All the news media has been focusing on the November 8 election which has turned out to be the greatest reality show of all-time. The two candidates have record-low popularity ratings and the personal nature of the campaigns with both candidates trading accusations has been nothing short of a three-ring circus. Meanwhile, there are lots of problems in the world right now but for the next few weeks; absolutely nothing can distract the people of the United States from the Clinton-Trump saga.

The Russian leader, Vladimir Putin has been expanding his spheres of influence around the world since annexing Crimea in March of 2014. The U.S. and Western European governments leveled sanctions against Russia in the wake of the action. However, Putin was able to negotiate deals around the world that took some of the economic pressure off his country and allowed the economy to tread water. Russia is indeed suffering as a result of those sanctions, but deals with China and other nations eased some of the pressure.

There are many hot spots around the world right now where the United States and Russia are at odds, and relations have not been this bad since the cold war.

Lots of hot spots in the world right now pit the U.S. and Russia against each other

The focal point for the deterioration of U.S.-Russian relations is Syria where the basis of disagreement is the continuation of the Assad regime. Meanwhile, Russia has become close allies with Iran in Syria, and over recent weeks a heightening of tensions in Yemen has resulted in an exchange of rocket fire. The U.S. supports Saudi efforts to stop rebels that unseated the Yemeni government. The rebels have support from Iran and the situation in the nation that borders Saudi Arabia amounts to a proxy war between the Kingdom and Iran. Missiles have landed in Saudi territory and close to U.S. ships off the coast of the country. In response, the U.S. took out some of the missile defense systems operated by the rebels. The tension between the U.S. and Iran extends to Russia.

Additionally, Russia has deployed Iskander missiles to a base in Kaliningrad on the Baltic coast between Poland and Lithuania in a snub to the U.S. and NATO. Those missiles can travel up to 500 kilometers which put Western Europe in range, and they can carry conventional and nuclear warheads.

China and Russia have a newfound alliance that developed in the wake of sanctions as the leaders of the two countries have met and strengthened ties over recent months. Additionally, China continues to assert itself in the South China Sea, and North Korea has moved forward with nuclear tests without much resistance from the Chinese. Russia has taken an active leadership role in the international oil market, negotiating the potential for a supply cut or freeze at a recent meeting in Algeria. President Putin has acted as a mediator between Saudi Arabia and Iran in the talks, and a formal deal may follow at the November 30 OPEC meeting in Vienna. Furthermore, Russia has become the world's leading exporter of wheat this year surpassing the U.S. and the European Union. Bread and energy are perhaps the two most critical staples in the world and the Putin government's moves in the wheat and oil market have strengthened Russia's position in the global supply chain arena while challenging the United States at the same time.

Cyber warfare raises the temperature

The U.S. Presidential election is the most contentious in many decades, and there are signs that Russia could be involved in some of the cyber tactics that have resulted in the WikiLeaks releases. The current administration has said that it will take a hard line against the Russians and blames the Putin governments directly as the releases have been harmful to their candidate's party. The U.S. Director of National Intelligence and the Department of Homeland Security both named Russia as the hacking culprit last week, a serious charge as it amounts to a foreign government attempting to disrupt the U.S. election.

The military operations in the Middle East and Europe and hacking of emails from U.S. officials have raised the temperature between Vladimir Putin and outgoing U.S. President Barrack Obama. Former Soviet leader Mikhail Gorbachev said last week that tensions between the two countries had reached a "dangerous point." Gorbachev called for renewed dialogue, but that does not seem to be in the cards.

Is Russia preparing for war?

In response to the deteriorating relationship between two of the three world's superpowers, Vladimir Putin suspended an agreement with the U.S. on the disposal of surplus weapons-grade plutonium. Iran continues to poke at the U.S. military off the coast of Yemen, and the Russians have launched a nationwide civil defense training exercise to prepare the country for a potential nuclear, chemical or biological attack from the West. Zvezda TV told Russian citizens last week that " Schizophrenics from America are sharpening nuclear weapons for Moscow." At the same time, Russia is looking to increase and modernize its nuclear capabilities to move ahead of the United States despite bilateral agreements to reduce stocks of long-range nuclear missiles. A Russian news site reported that state officials were told to bring their relatives, particularly children studying and parents living abroad, home to Russia.

A chill has descended over the relationship between America and Russia over Syria, Yemen, NATO, and the allegations of tampering with the U.S. election. All the while, the Russian government has been preparing the citizenry for war according to ABC News, and the U.S. remains focused on WikiLeaks emails and alleged indiscretions from the candidates for the Presidency.

Commodity and other asset prices are likely to react to a heightening of tensions with Russia

The passing of the baton from one administration to the next in the United States is always a time for uncertainty. However, the deteriorating relationship with the Russians has caused this contentious election to be like no other. In a role reversal from traditional stances, it appears that the Democratic candidate has taken a hard line against the Russians while the Republican nominee has been advocating a new and better relationship with Putin focusing on common interest when it comes to terrorism.

The Russian-U.S. issue is a threat to stability in markets across all asset classes. The Russians hold a significant amount of U.S. Treasury bonds as do their allies the Chinese. The bond positions could be used as a financial tool against the U.S. if the situation escalates over the weeks and months ahead. Moreover, Russia is one of the world's largest producers of commodities and now holds a significant position when it comes to the international oil cartel. They have positioned as the biggest exporter of wheat which gives them power when it comes to consumers around the world. Rising commodity prices and falling U.S. bond values would create an economic nightmare.

Volatility ahead- Some Ominous Signs

The proxy wars in Yemen and Syria, accusations of cyber interference in the U.S. election and Russian preparations for war are ominous signs for the world at this time. If the situation continues to deteriorate, expect the prices of many commodities to rise. Gold and precious metals will increase, perhaps dramatically, if concerns about war increase. The price of crude oil will also rise as the political premium could increase on supplies all over the world, not just in the Middle East. Metal and mineral prices such as nickel, iron and steel, precious metals, fertilizers, aluminum and many other commodities produced in Russia could rise alongside the temperature for a potential conflict that threatens to turn from cold to hot.

The result for the U.S. and Western Europe could be a horrific combination of inflation and recession or stagflation if the bond and stock markets tank and commodity prices explode higher. There are some ominous signs that there will be tremendous volatility in the months to come and now is a good time to start protecting portfolios from some real and present dangers.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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