Crimea, Russia, Ukraine And What It Means To Investors
Since Monday's market is all about the situation in the Ukraine, we thought it would be a good idea to bring investors up to speed on what is happening and the impact it is having on the markets.
On Friday afternoon, the S&P 500 dove 20 points (1.07 percent) on reports that 20 Russian planes -- each containing about 150 troops -- had landed in Crimea. The fear was that Russia had begun to invade/occupy the Ukraine.
Over the weekend, these fears were borne out, as Russian President Vladimir Putin received permission from Russia's parliament on Saturday to use military force in the Ukraine (of course, the parliamentary approval came a day after Putin had sent thousands of troops into Crimea).
Putin has tried to suggest Russia is justified in its move -- saying Moscow needs to protect its interests and people in the area. “In connection with the extraordinary situation in Ukraine, the threat to the lives of citizens of the Russian Federation, our compatriots, and the personnel of the armed forces of the Russian Federation on Ukrainian territory (in the Autonomous Republic of Crimea) ... I submit a proposal on using the armed forces of the Russian Federation on the territory of Ukraine until the normalization of the socio-political situation in the that country,” Putin told the parliament.
The West Objects
Since Friday, while there has been growing inflammatory rhetoric from Ukraine and Russia, it is important to note there has been no outright violence in this series of events -- and not a single shot has been fired so far.
As is to be expected, Western leaders have condemned Russia's move. President Obama has issued statements toward that end and U.S. Secretary of State John Kerry is heading to Kiev for talks.
Further, the G7 issued a statement over the weekend that condemned Moscow's actions, while the US has threatened sanctions designed to "isolate Russia economically."
In Europe, EU foreign ministers are due to meet in Brussels for an emergency session. In addition, there are discussions between U.S., EU and Russia about the possibility of observers from UN and the Organization for Security and Cooperation in Europe being deployed in the region.
The Impact on the Markets
As is to be expected in this type of situation, the impact on global markets has been broad-based. With the exception of Shanghai, all major stock markets moved sharply lower on Monday. European bourses were down two percent or more, and U.S. stock futures were down approximately 21 points in early trade.
We should also note that there has been strong buying in "safe-haven" assets such as Gold, the U.S. dollar and German Bunds. As such, it appears that the "crisis trade" in being put on in full force at this time.
German bond yields dove early Monday, with the 10-year yield falling approximately 6 basis points to 1.57%, while gold was up more than $29 to $1350.
Not surprisingly, the biggest market moves were seen in Russia, with the RTS index diving approximately 14 percent, while the ruble hit another record low against the dollar. In addition, Ukraine's stock market index fell 12% Monday.
All About Oil
Why should investors care about what goes in between Russia and the Ukraine? Apart from the fear of open warfare, it's really all about oil supplies and the price of energy.
According to reports, one of the keys to the situation is the risk to Europe relating to energy supplies. Understand that Russia supplies Ukraine with more than half of its natural gas supplies, and that just over 30 percent of total energy consumed in the EU is delivered from Russia via pipelines that run through Ukraine.
This uncertainty caused traders to send natural gas prices higher by more than 1.5 percent Monday, while crude prices also gained more than 2.5 percent.
Russian Central Bank Takes Action
In an effort to ward off potential selling of the ruble, Russia's Central Bank took action and hiked interest rates by 1.50 percent to 7.00 percent. The Central Bank of Russia reportedly is also selling dollars, in an attempt to avoid a run on the currency.
The Bottom Line
The bottom line for the markets is that everything except the news out of Ukraine/Russia will be tossed aside.
Earnings, economic news (which was actually better than expected so far), M&A, Fed-speak, the yen, trendlines, support zones, moving averages etc - none of it matters.
The start of the trading weeks is about the "fast money" getting out of the way (read jumping on the short side for a trade) and the bears talking about what "could" happen if war were to begin.
In short, stocks had recently broken out to the upside and had become overbought in the process. Now the bears have the "trigger" they've been looking for, in order to begin a test of support as well as the bull's resilience. Experience tell us that this is the time to either "panic early" (as the saying goes, "panic early or not at all") or simply ignore the headlines and stick to your discipline.
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