Crimea - political sanctions doing little

Some of the weakest political and economic sanctions have been imposed on Russia overnight as Crimea is officially recognised as a sovereign state by the Russian Parliament, with President Putin signing a decree.

As expected, fairly toothless sanctions have been imposed, with the US targeting around two dozen individual Russian and Ukraine officials with travel bans and some asset freezes; the EU placed sanctions on 21 individuals, 13 of which are from the Russian Federation. These minimal sanctions may have some in Russia questioning if its run for the exit out of the US (having seen $105 billion exiting US treasuries over the past week) was justified.

What is more interesting is Russia’s first step towards negotiations over how the Ukraine may be allowed to govern. The Russian foreign ministry had stated it will seek military neutrality for Ukraine, changes at the federal level to give more rights to the regions, and Russian to be officially named as the state’s second language, which is not going to be accepted by Kiev, Brussels or Washington.

The market’s response to the developments from both sides was negligible; these scenarios had been factored in and saw the Micex actually gaining ground after having lost 26% year-to-date as the ruble advanced. USD/RUB lost 1.11% as the non-economic sanctions were imposed; the EUR/RUB also saw similar moves. This is not surprising as looking back through history to the Russia-Georgian war in 2008, both France and Germany vetoed a vote on how to respond to Russia’s incursion into Georgia’s sovereignty as the UN, Poland and the US looked to impose tough economic sanctions. The inaction at the international level saw Russia walking into South Ossetia five days later. There is talk that Eastern Ukraine could be next if ethnic Russians in Ukraine are in ‘imminent danger’, which means Donetsk is the next possible flash point.

This time around it looks to be a similar story as the like economic sanctions are going to be minimal at best. However, there are pockets of the markets that might actually feel stress from the geopolitical tensions. There is talk that both the US and Europe could impose defence contract freezes that would see Russia locked out of taking defence products from European and the US.

The company I would therefore be watching if that sanction eventuates is Airbus Group. Sub-unit EADS is one of the world’s largest civil and military aircraft designers, along with military communication systems, missiles, satellite technology and other related products which do supply hardware to the Russian Federation. I would also be watching energy plays; Total, BP, Royal Dutch Shell may actually see increases if Russian supplies are used as bargaining chips to reduce sanctions. 

As the diplomatic condemnation rings out from around the world, the markets that are going to be the best way to gauge the impact will be USD/RUB, the DAX and energy; so far it has been very smooth sailing in all three markets. 

Ahead of the Australian open

However, Asia is likely to see similar gains that Europe and the US markets saw overnight as US industrial production that came in ahead of expectations, which saw the US snap back from the second worst week in 2014.

What will be interesting today is the RBA minutes that will give further colour to the bank’s outlook of the Australian economy. The AUD is like Teflon at the moment, and since the bank removed its easing basis it has been resisting any signs of economic weakness.

What might have also moved the markets’ perceptions over the last 24 hours on rates is one of the champions of the rate cuts over the past three years in Westpac, economist Bill Evans, removed his expectations for two more cuts in 2014 and he now expects a hike in 2015 which did see the AUD slightly higher.

What I believe is that the market is looking for is colour as to how the bank will act to counter the historically high AUD and what can be done to see non-mining picking up the slack. There is still softness in GDP data and forward indicators of business and consumer confidence, however sadly I don’t believe that there will be enough colour and today’s print is likely to be reprint of the February minutes.    

The relief rally from Europe and the US is going to positively impact our market today. We are currently calling the market up 27 points on the 10am bell (AEDT) to 5344, as copper stabilises and gold sees a bearish reversal - all positive calls for risk. Both the EUR and AUD were mildly positive overnight and suggest investors are willing to look to risk for investment.

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