Ukraine, the markets – what next? The US vs. Russia geopolitical tennis match, is coming down to the final set. Equity markets closed on the lows of the week last Friday, though still a mild decline, as investors took risk off the table. There is fear brewing for a new cold war over Ukraine. The final event for the week was a Kerry and Lavrov meeting in London, where they failed to reach any breakthrough agreements – click here for more details. Over the week end the referendum in Crimea seems set, for the potential annexation of Crimea to Russia. This clearly will dominate the trade over the coming week.
The west has said that if Russia annexes Crimea or worse yet invades Ukraine (troops are already massing on the borders), there will be a full blown sanctions war, leading to potentially unthinkable results. The full blown sanctions war could basically isolate Russia from the rest of the world and in return there is already Russian talk of nationalization of all foreign assets (including the energy assets) and potential cutting off the gas to the EU. If this should happen we could see easily 150 SP500 points shaved off immediately and a potential start of a global recession. The markets have largely ignored this risk.
The propaganda war is heating up on both sides, and there is a lot of detail on who did what and what historically this all means. I won’t go into all this detail, but rather discuss the most likely scenario that will happen, relative to the markets. Regardless of your feelings on this subject, we as traders must focus on the reality and our trading positions.
Putin who is already rich (reportedly has $40 billion), is a defacto Tzar of Russia and has reasonably large support in Russia, has nothing left to do but make his mark in history. He really does want to re-establish the Russian empire. He will not back down. The question is how far will he go and how fast. For the west, will the west appease, or go toe to toe with Putin?
The most likely scenario is that, Putin will annex Crimea, but keep Crimea as part Ukraine in some sort of autonomous state. He needs Crimea still to be part of Ukraine in order to balance a future vote in favor of the Russians in the entire state of Ukraine. He then will push to put a pro-Russian government in Ukraine. He will continue to put Russian troops in Ukraine, not to invade, rather to protect the people (wink) in Ukraine. The west will squawk loudly and threaten, but will limit their sanctions to targeted Russian oligarchs and not do a full scale Russian blockade. Yes the west I believe is bluffing – Putin will call the bluff. Putin will be satisfied to take Ukraine and be the “good guy” and not respond significantly to the sanctions.
This all will take several months to play out, and hence the markets may take a dip to as low as the 1800s on the SP500, but then rally back up to new highs as the situation then calms down, and the market learns to live with the situation. Today the tennis ball is in the court of Putin to execute his plan, then the ball will be back to the west in a seesaw propaganda war. There is a 20% chance I am wrong and the unthinkable occurs. Is the west not bluffing and will Putin go further than Ukranine? This scenario goes beyond the unthinkable. A story to watch carefully next week.
Blue Point Trading, William Thompson