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 While Russian markets were hammered after the country took control
of the Crimean region of Ukraine, the moves were less frenetic in
Europe and even more muted in the United States.
The crux of the issue, analysts say, is the extent and nature of an
eventual escalation. If military action is involved or Russian
President Vladimir Putin is seen as too aggressive in his demands,
expect a further drop in Treasury yields and in global stocks, at
least in the short term.
Over a longer period, however, investors expect this issue to cause
only a modest selloff in U.S. stocks, mostly because very little in
the way of U.S. sales depends on Russian demand.
"If a civil war is avoided in Ukraine, and unrest remains contained
and does not spread, then much like with Syria last September the
issue won't go away but the impact on markets should fade," said
Jeff Kleintop, chief market strategist for LPL Financial in Boston.
Russia's main stock index fell nearly 11 percent on Monday and its
central bank was forced to raise rates to defend the ruble, which
hit a record low against the dollar. A major European index fell
more than 2 percent, but Wall Street's losses were limited.
Absent a war that pulls in numerous nations, even a military
conflict isn't likely to hurt markets too badly. Citigroup
strategists point out that the Iran-Iraq war in the 1980s, the
conflict in Kosovo and the Syrian civil war have had a limited
effect on stocks.
"The history of international conflicts having much impact on US
equities is very limited and thus a much larger conflict would be
needed to have considerable negative impact," Citigroup chief U.S.
equity strategist Tobias Levkovich wrote in a Sunday note.
Emerging markets-focused equities, which underperformed the broader
S&P 500 throughout 2013, are likely to keep feeling the pressure,
according to Citigroup. U.S. sectors that directly respond to
changes in energy costs or food inflation might be more volatile if
economic sanctions are imposed.
Monday's 2 percent run-up in Brent and U.S. crude prices may be the
start of a climb that could hurt the already weak global economic
recovery. Higher energy prices will likely slow growth in the
developed world, making the hit on emerging economies even worse.
Economic sanctions that limit certain exports from Russia, such as
oil, would likely have a more detrimental effect on Europe, which
depends on Russia's supply of petroleum and natural gas. Companies
in North America that replace Russia's exports of goods such as
potash could benefit, said Robbert van Batenburg, director of market
strategy at Newedge USA.
U.S. large-cap exposure to the Russian market is limited. Sales in
Russia amount to about 7.4 percent of total revenue for Pepsi <PEP.N>,
3 percent for Alcoa <AA.N> and 2.4 percent for Abbott Labs <ABT.N>.
Those companies could be affected by sanctions, but lower bond
yields might offset any weakness that comes from reduced revenue
from Russia.
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Gold, the U.S. dollar and U.S. Treasuries rallied Monday, typical of
flights to safety.
"This looks very much like a chess game," said Kathy Jones, fixed
income strategist at Charles Schwab in New York.
"Putin made his move, and now how will the West respond? A further
move into Ukraine by Russia will continue to fuel concerns and cause
more safety bids."
Emerging market debt and equity funds last week are now on a
record-breaking streak of 22 and 18 straight weeks of redemptions,
according to BofA Merrill Lynch Global Research. The situation in
Crimea is likely to extend that trend.
"This reminds investors of the perils of investing in emerging
markets that don't always respect the rule of law," said Brian
Jacobsen, chief portfolio strategist at Wells Fargo Funds Management
in Menomonee Falls, Wisconsin.
The flight from emerging markets that persisted throughout most of
2013 could be amplified by Russia's moves in Ukraine. That could
also benefit U.S. stocks as well. With Monday's selloff, the
Standard & Poor's 500 index is still just a bit more than 1 percent
from an all-time high.
Investors have been pulling money from Russia-only equity strategy
funds. They had assets of $10 billion as of the end of February,
down from $16.8 billion in December, according to preliminary Lipper
data.
The MICEX index <.MCX> of Moscow stocks tumbled 10.8 percent Monday.
U.S.-based exchange traded funds that invest in Russia naturally
fell in tandem. The Market Vectors Russia exchange-traded fund <RSX.P>
slid 6.9 percent, with more than 25 million shares changing hands,
the most active day for the ETF ever. At its session low it traded
at levels not seen since 2009.
(Reporting by Rodrigo Campos; additional reporting by Richard Leong,
Sam Forgione and Angela Moon; editing by Andrew Hay)
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