What a difference a week makes. After pro-Russian rebels shot down a civilian airliner in the Ukraine last week, the focus has shifted to geopolitical concerns and the prospect of mounting tensions between Russia and the rest of the developed world.
The US, Australia, the UK and Germany have used strong language to pin the blame for the atrocity on Putin, however the EU has stopped short of following suit. EU Foreign ministers are scheduled to meet on Tuesday; however, the markets have already been prepped to expect a muted response after a spokesman said that the EU will urge Russia to distance himself from the rebels rather than announce new sanctions.
Russia holds better cards than the EU
While the US is reportedly planning new sanctions, causing Russia to try and quickly reduce its dependence on IBM and Microsoft technology, the EU needs to tread more carefully. If the EU imposes sanctions on Russia then Moscow could retaliate with its own sanctions, which could threaten Europe’s energy supply. A spike in the oil price could disrupt the Eurozone’s economy, which has already started to soften.While we think that the EU will tread carefully when it comes to sanctions on Russia, if there is a spat between Europe and Russia then we could see the focus shift to the ECB and the need for QE, although we think this scenario is very unlikely.
Financial markets’ history of shrugging off sanctions
In the past, financial markets have shrugged off fears about potential sanctions on Russia, and if the international community has more bark than bite we think that risk assets like stocks could continue to grind higher, and the markets may go back to concentrating on the fundamentals.While the focus has been on Ukraine and the escalation of fighting between Gaza and Israel, Portugal’s domestic woes have been in retreat. Portugal’s 10-year bond yield has fallen from a high of 4% back to 3.67%, which suggest that the market has confidence that events at Banco Espirito Santo are under control. This could be good news for risk once geopolitical concerns calm down.
Longer outlook remains cloudy
While we think that the broader financial markets can weather the most recent geopolitical storm, the world has become a more dangerous place in recent months, which could lead to increased levels of nervousness and investors choosing to book profits around big levels in the major markets like 2,000 in the S&P 500.Domestic Russian woes:
Russian equities have taken the brunt of the market sell off and are down a further 3% on Monday, pushing the index to its lowest level since May. This is significant, as changes in Russian stocks can correspond with changes in the price of gold. As you can see in the chart below, since June, the gold price and Russia’s Micex index have moved together, they peaked at the same time around 9th July, however, gold’s position as a safe haven has protected it from the latest sell off in Russian stocks, and it has continued to rise even as the Micex has sold off.Traditionally, over the longer term gold has tended to move in the opposite direction to Russian stocks, thus if the Micex continues to sell off then we may see further gains in the price of the yellow metal. Of course, the opposite could be true, and if Russian stocks can claw back some recent losses then the gold price could come under downward pressure.
Read my colleague Fawad’s latest piece to get an in-depth technical view on where this precious metal may go next HERE.
Takeaway:
- If the international community imposes harsh sanctions on Russia, financial markets could come under pressure.
- However, if the international community has more bark than bite, we could see market concerns start to fade and risky assets may continue to rally.
- For now Russian stocks are taking the brunt of the international reaction against Russia.
- Watch out for the relationship between gold and Russian stocks.
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