Wall Street Breakfast: Russian Roulette

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Russian roulette

Things are moving fast following a headline-provoking weekend in Russia, where an aborted mutiny by Yevgeny Prigozhin and the Wagner Group has shaken expectations about what might come next in the Kremlin’s war in Ukraine. An armored Wagner convoy was only 120 miles from Moscow when a revolt was called off, with the paramilitary group shooting down six Russian helicopters and a command-center plane after seizing the military logistics hub of Rostov-on-Don. Under terms of an agreement to end the crisis, Wagner’s 25,000 heavily armed troops won’t face prosecution, while Prigozhin will be exiled to Belarus, though his days there could be numbered after threatening to storm the Russian capital in a “March of Justice.”

Explainer: The bitter feud has been ongoing for months, with Prigozhin accusing the Kremlin of battlefield losses due to shortfalls in financing, weapons and even recruitment. Things took a turn for the worse on June 10, when Russia’s Ministry of Defense ordered all volunteer detachments to sign contracts with the government. Prigozhin refused as it would deprive him of his power base and took his chances on a revolt instead of being forced into insubordination. Putin has also historically promoted rivalries in the ranks to prevent succession challenges, but this one seems to have backfired and could leave the Russian strongman’s regime with some permanent damage.

“I don’t think we’ve seen the final act,” U.S. Secretary of State Antony Blinken declared. “We’ve seen more cracks emerge in the Russian facade. It is too soon to tell exactly where they go, and when they get there, but certainly, we have all sorts of new questions that Putin is going to have to address in the weeks and months ahead. Our focus is resolutely and relentlessly on Ukraine, making sure that it has what it needs to defend itself and to take back territory that Russia seized.”

Markets are looking at the situation as a non-event for now, but traders are on edge should things morph into something bigger – like a full-out coup, uprising or even a civil war. Energy is likely the biggest sector that would be impacted, with Russia being the world’s third-largest crude producer and a key supplier of natural gas to Western Europe. Even safe-haven gold barely caught a bid after the weekend’s events, but based on past disruptions, shocks could roil everything from stocks to currencies pretty quickly if trouble ensues.

Defense sector: NATO allies will be thinking of the latest developments when considering new military funding or the supply of Lockheed Martin-built (NYSE:LMT) F-16s, which would upgrade Ukraine’s firepower but could also escalate the situation with the ability to strike deep into Russia. The U.S. has already made several U-turns on supplying more advanced weapons, including heavy artillery, M1 Abrams tanks and the Patriot missile defense system. Things are taking on more importance as the Ukrainian military gets a long-planned counteroffensive underway and ahead of a NATO summit in Vilnius next month where Kyiv will press the alliance on stronger defense commitments. (21 comments)

What’s next?

Investors are keenly watching how things play out in Russia, with the developments having the potential to jolt the global economy and markets. Which of the following scenarios is likely to play out first following the chaos seen over the weekend?

· Another challenge to the rule of Putin
· A big Ukrainian military counteroffensive
· Doubling down on the war effort by Russia
· A ceasefire or an attempt at negotiations

Take the survey and share your thoughts in the WSB comments section.

Oil demand

The Organization of the Petroleum Exporting Countries has projected that global oil demand will increase to 110M bbl/day by 2045, with overall energy demand expected to rise by 23%. While the group acknowledges that renewable power will play a greater role in the world’s energy mix going forward, it stressed that “oil remains an integral part of the mix.” OPEC also raised concerns about the underinvestment in the oil industry, saying this could jeopardize existing energy systems’ viability and result in “energy chaos.” This contrasts with the IEA’s recent forecast of global oil demand growth tapering off in the next few years. (9 comments)

Pills for obesity

The investor craze for obesity treatments continues as Novo Nordisk (NVO) said high-dose oral versions of its diabetes medication semaglutide significantly reduced weight in late-stage trials. That could make them a more convenient alternative to expensive injections. Semaglutide is the active ingredient of popular weight loss treatments Wegovy, Rybelsus and Ozempic, with Novo ahead of the crowd in terms of weight loss drug trials. Rival Eli Lilly (LLY) is close behind, having recently completed a mid-stage trial for its weight loss pill orforglipron. (2 comments)

Merger Monday

IBM (IBM) has agreed to acquire software provider Apptio for $4.6B from Vista Equity Partners with available cash on hand. The deal will boost IBM’s IT automation capabilities and drive significant synergies across growth areas. Apptio was taken private by Vista Equity Partners in a $1.9B deal that faced several shareholder lawsuits at the time. IBM acquired eight companies in 2022, the last being Octo, and is exploring a sale of its weather business. (29 comments)

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