“Let me warn you, if you start chasing after views, you’ll be left without bread and without views”
Weekend headlines will add to market nervousness today. The headlines from east Ukraine over the weekend will unsettle markets at the start of trading today. The situation is clearly very dangerous and largely unpredictable. But, despite the ratcheting-up of rhetoric from all sides, the evidence still suggests that Russia will not invade. Instead Russia has always supported the protestors’ demands for some form of federalism in the east.
Sanctions risk if the West blames Moscow. The key risk is whether the US/EU believes Moscow is behind the escalation of violence in the east and, even without a military incursion, moves to the more serious economy and trade disrupting sanctions. This question will be the focus of investor attention over the coming days.
Diplomatic efforts were starting to pick-up. As the crisis escalates on the ground, the foreign ministers from Russia, Ukraine and the US/EU are due to meet for the first time in Geneva on Thursday to discuss the crisis. That is the same day President Putin is scheduled to hold his annual televised Q&A session and Ukraine and the economy are expected to dominate. If that planed meeting is cancelled this would be taken as a very negative signal by investors and we would see a further step down in equities, the ruble, and in debt markets.
How the gas dispute proceeds will provide a good indicator. Based on that critical assumption, i.e. no military action and no increase in sanctions against Russia that such a move would certainly provoke, investors need to follow the gas dispute closely. What happens here will provide the best indicator of whether political pragmatism is emerging as the backdrop to the headline crisis or whether the dispute either remains deadlocked or could be deteriorating. In the case of the former, long-only investors should start buying into selected equities and sovereign debt while, in the case of the latter, they should continue to stand-off.
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