March 10, 2014
Weekly Market Outlook
By Keith Schneider
The crisis in Crimea and the Ukraine is the problem de jour. It is important to study history so that we learn from someone else’s mistakes. This in turn allows us to make new ones to learn from, which we then call progress. The ouster of Ukraine’s president, a corrupt Russian crony, has precipitated a crisis over control of the region which includes Crimea, a peninsula on the Black Sea.
Therefore, it might be helpful to go back in time. In 1854 one of the most famous military follies ever recorded took place in Crimea when the British tried to wrestle control of it from the Russians. Needless to say, the near suicidal attack led by Lord Cardigan did not end well for the British, but did result in a great poem and made Lord Cardigan a war hero along with the sweaters he designed for his troops. Attacking Russia didn’t end well for Napoleon or Hitler either. In fact, no one in recent history has successfully invaded Russia. Obviously, the war-mongering talking heads here in the US need to brush up on their history and take that into consideration.
The majority of Crimeans are Russian, even though it was or is technically “independent “and a part of the Ukraine. Complicating matters even further, mainland Ukraine which overall is politically leaning towards the west, has critical Russian gas running through it, which collects much needed transit fees that enables Russia to sell energy to Europe. In turn, those fees generate critical cash flow to the Kremlin. Crimea is also of critical strategic interest to Russia where it has been home to the Russian Black Sea fleet for centuries. Going to war with the Russians as certain factions seem to be happy to do here, is utter folly and akin to another Charge of the Light Brigade. Obviously, this crisis has numerous financial implications.
The markets have been on edge as the crisis in the Ukraine has festered and worsened. Even as US Equity markets hit new highs here in the US on good economic news, volatility levels are rising or holding steady and it’s often a bearish leading indicator. The tension in the Ukraine has kept a lid on bullish equity markets.
The Russian market has been pummeled, dropping almost 10% since the crisis blossomed. Putin and his oligarch cronies are watching their portfolios sink and that is not good business. They have their own balancing act to perform. Foreign investors already spooked by other missteps by Putin regarding civil rights issues have reduced or are considering reducing their holdings and future investments.
Much of Western Europe, including the Ukraine itself depends on Russian gas shipped through the Ukrainian pipelines. Any disruption of that flow would put further pressure on a fragile Russian economy. It might be painful short term as energy prices would skyrocket, but Western Europe could pivot away from dependence on Russian energy and permanently reduce it payments to them as it becomes clear that Russia might not be a reliable trading partner. Not good long term for Putin and his cronies.
Also interesting to note -the Euro is very strong against the dollar and looks poised to break out of a multi-year pattern. Seems counterintuitive since Euro members are closest to the potential turmoil and most likely to suffer some economic hardship. The Ukraine itself is a potential threat to the banking system as it owes about $140 billion to foreign creditors and suffers from massive fraud and general financial mismanagement, which precipitated the crisis.
The Russians are not without economic options either as they have been saber rattling to dismantle the dollar’s reserve status by stopping accepting payments in dollars for oil, gas and other commodities.
The unintended consequences of further escalation of the crisis is unclear, but so far the crisis has hurt the Russian stock market, has driven the Euro and Commodities up, while putting pressure on the US dollar as Putin tries to retaliate against economic sanctions.
For some most interesting chart setups let’s go to this week’s video.