Turmoil in Emerging Markets hit investor confidence in January and, after a stellar February, the crisis in the Ukraine could lead to profit taking this month. Indeed, volatility spiked to a similar level and the S&P came off its all-time-high on Friday as fears started to set in.
Ukraine mobilised for war over the weekend after calling Russia’s ‘right to invade’ a “declaration of war”. The split within the country, between those wanting closer ties with the EU and those looking to Russia, is not so clear cut. It is not a 50/50 split and Russia’s influence within the country is not as prevalent as is widely believed. The Crimea, is indeed a hot spot – the location of Russia’s Black Sea military base and a large local employer but what is overlooked is that many Russian-speaking Ukrainians are nevertheless nationalistic.
Requesting aid from the US or Europe, they have already refused structural reforms required for a bailout. Furthermore, their financial burden looks to worsen as they risk losing the ability to buy gas from Russia at a discounted price.
Reliant on Russia for a substantial percentage of their gas needs, this turmoil effects Europe directly as well.
For US policy, the question is whether a rise in political risk could constitute the “significant change” the Fed said they need to see in order to halt winding down support. Currently rhetoric implies a commitment to staying the course, but if it seems economic weakness is due to more than the bad weather, this could prove convenient.
What to watch: Energy commodities are feeling the impact. Companies with tight margins and high input costs may be hit as gas and oil prices rise. Defence stocks may see renewed interest despite a military intervention being unlikely.