Crimea a River

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The concern heading into the weekend was the Crimea Referendum. Putin and Russia were warned that there would be consequences if the referendum passed. Meanwhile, back in the US, the market awaits the Fed meeting and Yellen’s statements to see if there will be any change to the current monetary policy. Expect some volatility (up and down) in this market.

Crimea a River

Putin confronts Obama on the Ukraine issue…

The Ukrainian situation is escalating. Crimea, the autonomous Republic in the south of the Ukraine, has voted in favor a referendum to join Russia. It passed by an overwhelming 97%. Of course, Crimea is the Russian speaking part of the Ukraine and if you followed Crimean news they have been adamant that the elected government of the Ukraine was overthrown in a coup by the Ukrainian speaking minority that are anti-Russia. The Referendum has been denounced by the US and Europe, as well as the newly installed Ukrainian government as illegal. The irony for Russia is that the new Ukrainian government had overthrown the previously elected government in a coup. Thus, for them to call the referendum of the autonomous republic of Crimea as illegal is like the pot calling the kettle black.

Russians Rally!

Several other pro-Russian cities in the Ukraine are calling for similar referendums. Donetsk and two other cities had pro-Russian rallies and they have taken the city government buildings. This shows we could see a wider separation within the Ukraine mostly along ethnic lines between Russians in the South and East vs. Ukrainians in the North and West. Could we see the Ukraine break up between the East and West Ukraine, form a new state, or become a federation of sorts?

Consequences, schmonsequences.

President Obama announced there would be consequences if the referendum went ahead and passed. However, no one really knows what he meant by “consequences”. If it is to be sanctions against Russia, well our trade between the US and Russia is very small and will not impact anything. I think everyone doubts it will be military action. The last thing we want to do is escalate Cold War 2.0. So what will the consequences be? The US is surely pushing the EU to institute sanctions against Russia, but the problem is that Europe relies on Russian oil and gas, as well as trade. So European sanctions against Russia will most likely hurt Europe as badly, if not worse, than it would for Russia.

Courtesy of Center for Human Systems

The US’s biggest threat has been to go after financial and bank accounts of 20 Russians that supported the Crimean Referendum, freezing their accounts in the West. But isn’t it Putin that is responsible? Why not freeze his accounts and push sanctions against him and his government? There is no talk of freezing Putin’s account or that of the Russian government. I think the US and Europe doesn’t really want to provoke Putin anymore and thus the US is falling back on tough talk and very weak sanctions against 20 sacrificial Russian lambs. I guess we had to do something, but this seems like some seriously weak sauce and I am sure Putin sees it as just talk.

Market Volatility?

After the heightened rhetoric from Europe and the US last week, in which we publicly met with the newly installed Ukrainian government, condemned Russia, and denounced any Crimea referendum, the media and markets were prepared for some volatility on Monday if Crimea referendum passed. Ironically, the markets in Russia rallied. Putin’s popularity rose dramatically, and the people of Russia see this as a victory and a strong Russia after decades of stagnation and difficulty since the downfall of the Soviet Union. On Russian Television and news coming from the East, there is a general sense of patriotism and the anti-west propaganda has brought a new found optimism to the people. The rally in the eastern financial markets poured over into Europe and now we are seeing a US pre-market rally. It certainly seems odd that the Russian and US financial markets would rally after the Crimean Referendum passed after all the heightened rhetoric and threats from the US. Perhaps it was the inverse of Buy the Rumor and Sell the News? We sold into the heightened concern and the market was overly pessimistic from the rhetoric (Sell the Rumor) and now since it passed (and there is no immediate rhetorical response) the market is rallying (buy the News).

Muted Response

The US and Europe response is muted and the announcement of any sanctions comes with a whimper. Russia is saying; “a weak sanction? Big deal!” The US has not threatened to sanction or freeze Russian or Putin’s assets or fully bring a global embargo or sanctions against Russia, I don’t think they could – too many nations rely on Russia for trade, energy, oil, gas. A sanction against Russia by those dependent nations would hurt them as much or more than it would hurt Russia.

Courtesy of headline asia

So we wait. Russia has moved and moved again, the US remains tough on talk and threats, but has done nothing at this point. Putin is not an idiot, but he is also not afraid and that means there is a good possibility that he makes another move again towards either a wider referendum of Russians in the Ukraine or makes a push for taking Kiev. With his popularity on the rise and patriotism swelling, he feels emboldened and that is not a good thing for East-West relations.

Support & Resistance

INDU 16,000
There seems to be some support at 16,100 and the pre-market futures are rallying. So we could see a short-term bounce. We also have the Fed meeting this week.

NDX 3650
This is the short-term support and if it doesn’t hold we could see a quick fall to 3600 or even 3500. The tech sector saw a strong move higher, which started to become parabolic in the last 6 months. With Crimea and the Fed meeting we could be in for some more volatility that could send this index up or down sharply.

SPX 1840
We fell right to this support and it looks like we are getting a small bounce. The VIX which rocketed above 17 looks like it might fall back down quickly. However, we should continue to expect volatility in the near-term.

RUT 1180
The RUT is seeing a strong bounce in the pre-market futures, but how far can it climb? I am not sure if this is just a reprieve rally after the Crimean vote and the subsequent calm, or if this has any real legs.

FOMC Party

Crimea is bringing broad-based volatility to the markets; we wait for the next shoe to drop in this highly watched chess match between the East and West. So far Putin is on the offensive and the West has been responding with words and threats, but there is little they can do without taking a more seriously military show of force. We certainly don’t want to get there, but so far the Russians are seeing no response to their show of muscle and that has emboldened both Putin and the Russians.

Meanwhile, the FOMC meeting will bring some clarity to our monetary policy going forward. I believe that Yellen has been setting the tone and expectations that we could see a slowdown in the amount of the taper or even a pause. She now also has the concerns with Russia that she could use to justify a more “Easy” monetary position, wanting to make sure the US economy is not squeezed further in a highly charged geopolitical situation that could bring forth economic sanctions.

That means a slow or pause in the taper could bring some renewed vigor to the bulls and help send the market higher. However, if she stays the course, tapers again and shows a more hawkish tone and even leaves the door open to tightening, we could see significant selling pressure come to the markets. I believe there is little chance of any hawkish tone, but there is a chance that she continues with Bernanke’s taper. Personally, I think the decision will be based on how much she feels empowered to make the Fed her own rather than remain in the shadow of Bernanke. It is still Bernanke’s Fed, until she starts making her OWN policy. Will she come out of her shell and change course? I believe she wants to, her tone and couple of recent speeches suggests so; however, is she emboldened to take action? I’m not sure.

Courtesy of China Daily

One Response to “Crimea a River”

  1. McRocket says:

    Thanks for this.

    Yes, what hypocrisy, Obama supports an illegally installed coup immediately. But denounces a referendum as illegal.

    Sure, the referendum was a bit iffy…but since when is a coup against a democratically elected government considered good democracy?