As Russia and Ukraine Mull Negotiations, How Realistic Is a Market Rally ?

From videos of "Z"-emblazoned tanks mired in the muck of Ukrainian mud, abandoned, to broad protests of Ukrainian citizens decrying their occupiers, Russia's "special operation" in Ukraine is almost certainly not progressing in line with Moscow's plans.

While the Russian military has inflicted immeasurable human suffering on the people of Ukraine and caused a refugee crisis to cascade across the European continent, its actions have led it no closer to conquest than when it began. As such, its leaders may have to reassess their goals and come to the negotiation table.

Indeed, Ukrainian President Volodomyr Zelenskyy has hinted at Russia's increasing interest in doing so.

"Our delegation is in negotiations with the Russian Federation," he said on Wednesday. " It is important. It is difficult, but important, because any war ends in an agreement. Meetings continue. As I am told, the positions in the negotiations sound more realistic."

If any agreement or ceasefire is indeed within reach, the implications across energy, financials, and more would be vast. Amidst this opportunity, investors will also need to be nimble.

Razing the Russian Economy

In line with the misplaced expectations of its military ability, Moscow appears to have greatly underestimated the Western response to its invasion of Russia's neighbor.

"Russia has been hit by unprecedented sanctions and cut off from the global economy. Its own economy is in free fall," Secretary of State Antony Blinken said on Thursday. "Hundreds of corporations have closed operations. In a matter of weeks, President Putin has destroyed 30 years of opening to the world and economic opportunity for the Russian people."

Blinken's view of the damage to the Russian economy might not be far off. Per a Yale report published Friday, over 400 companies have withdrawn from Russia while numerous others have suspended operations. This includes Western giants like McDonald's (MCD) , tech companies like Qualcomm (QCOM) , and luxury retailers like LVMH (LVMHF) . Worse still, major financial institutions have been decimated by a SWIFT ban, while payment processors like Visa (V) and Mastercard (MA) have pulled out of the market.

Indicative of the status of the Russian economy, some major oligarchs are making allusions to the 1917 October revolution. In this context, Russia appears to have only more to lose as fighting continues. Meanwhile, after enduring heavy shelling, Ukraine looks no closer to raising a white flag than it did early in the conflict. Even beyond Ukraine's borders, NATO has been galvanized into action with a massive policy shift in Berlin and the Baltics put on high alert.

Overall, these pressures, both external and domestic, are likely to lead Vladimir Putin and his advisors to make more realistic demands for peace accords just as Ukrainian President Zelenskyy indicated earlier this week.

In this scenario, energy stocks would be likely to fall back to earth while nearly every other sector would benefit. This is particularly so for European stocks, which have been hardest hit by soaring prices at the pump and soaring inflationary pressures that exceed even red-hot U.S. figures, given fertilizer and raw material supply chain tamps.

"If a deal were to materialize, it would certainly put downward pressure in the recent rallies we have seen in commodities," Mark Gibbens, CEO at Erudite Capital, told Real Money. "Obviously, gas prices, along with food and fertilizer should come down further from their current levels. Prices of goods such as neon and palladium, used in the production of semiconductors, would likely also come down."

Gibbens expects any progress on peace talks to lead to sizable relief rallies in the U.S. and Europe.

Fool Me Once...

In the immortal words of former President George W. Bush, if you fool me I can't get fooled again.

For the Ukrainians, this malapropism rings true in terms of negotiations with Vladimir Putin. Following the Russia's annexation of Crimea and fighting in Donetsk and Luhansk, the Minsk Protocol was signed in September 2014 to establish an uneasy peace outside of these disputed territories. This agreement was then shored up in February 2015 with the second Minsk agreement that established the status quo prior to the Ukraine invasion.

However, by February 2022, the Russian state completely disregarded this agreement. As a result, faith in negotiations at present is, understandably, not exceedingly high.

"Unfortunately we're still facing the same Russian logic - making maximalist demands, wanting Ukraine to surrender, and intensifying siege warfare," French Foreign Minister and party to the Normandy Format Jean-Yves Le Drian told a French newspaper on Thursday. "Just as in Grozny and Aleppo, there are three typical elements - indiscriminate bombardment, so-called humanitarian 'corridors' designed to allow them to accuse the other side of failing to respect them, and talks with no objective other than pretending that they are negotiating."

From this perspective, many market minds are advising investors not to get their hopes up.

"This war is not going to end quickly and there is not going to be a peace deal - so a stock market rally is not going to happen," Bob Bilbruck, CEO at consultancy firm Captjur said. "In fact, we are predicting the reverse of a rally. We are predicting a long-drawn-out conflict that the Chinese make worse by backing Putin."

Indeed, per Politico, China is currently moving closer to providing direct military support to Russia. If this does come to fruition, it threatens to totally divide the world economic system as both U.S. and EU leaders appear unlikely to accept such an act without levying significant sanctions on China as well. Needless to say, such action would only exacerbate pain in markets that are far more sensitive to China than they are to Russia.

For now, optimism of peace negotiations is understandable. But investors will need more than hope to place any bets on a relief rally at this time.

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At the time of publication, Kevin Curran had no position in the securities mentioned.