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Ukraine tensions further rattles markets

There are growing reports that Russian troops have now taken checkpoints around the Eastern board and the acting Ukraine Prime Minister has accused Russia of demanding the surrender of two Ukrainian warships posted near Sevastopol.

The markets’ reactions to the developments from the weekend and last night were as expected, having seen the US futures taking a hammering on the open; the S%P fell by as much as 1.3%. European markets have been the hardest hit with the DAX -3.4% or -333 points, as the FTSE shed 104 points; questions are now being raised as to how Europe will respond to Russia’s silent invasion.

Why Europe’s response is being watched is due to commodity trades with Russia, and unlike its G-7 counterparts in the US and Canada, Europe has a trickier path to tread.

The US as expected has acted in accordance with its standard response to these kinds of events. It has cancelled travel for diplomats, threatened sanctions on trade and banking; it has even kicked Russia out of the G-8. But Europe has yet to really push Russia on its current military program.

The modest response is hotly debated, but it is clear that most believe it’s over gas supplies. One third of Europe’s gas and oil comes from Russia - most of which is piped through Ukraine. Brent and the WTI both jumped up 2% overnight. How much this will impact diplomacy is being mitigated by Europe entering spring, which was preceded by a milder-than-usual winter, suggesting it could see diminished supply from Russia with little effect. But this will not keep the price of gas and oil down; they will be the markets to watch.

Russia has also felt the impact of its actions; the Russian central bank overnight raised rates 150 points to 7% as its tries to stabilise Russian money markets. The RUB sank to new lows against the EUR, USD and CHF as the Micex saw 13.5% of its value wiped off in one day as Gazprom - the state-controlled Russian gas supplier to Western Europe - took one of the biggest hit on the Micex.  

Russian 10-year bonds rose to 9% from 8.1% on Friday’s close and will likely see even more pressure as sanctions are stepped up and foreign investors shed bonds in droves. So far this year the Micex is down 23% (globally the worst performer) and the Ukrainian market is only down 8.9%.

As we watch what could be a new cold war scenario, remember one fundamental difference between the 1960s and now. Unlike the in the past, Russia is under capital market forces. The US and Europe’s biggest defence is to squeeze funding to the Russian state; the Kremlin may be looking to move boarders, however the Russian private enterprise population will be at its door if they see funding at a crisis point as cross border trade is now the norm. The amount of RUBs in Paris, London, Berlin and beyond is ginormous, a banking and funding freeze will see these funds being seized and frozen in the respective markets; Russia could see its action starving itself from the inside out. It makes this situation all the more urgent from a Russian stand point, and why the tinder box is seeing sparks.

Ahead of the Australian open                                                                                                                        

The AUD has remained resilient in the face of the tension from Ukraine and the softest Chinese manufacturing PMI print in eight months to remain above 89 cents. The fact that the RBA has removed the easing basis shows that there is no monetary policy tools to finesse the currency lower than traders see the current level as fair value.

Today will be all about the press statement once more; the breakdown of domestic conditions is unlikely to sway the board one way or the other, and if the ‘stable’ call on rates remains, the AUD will see the 89 cent handle become a rock solid support line, and more commentators will start to rise their calls of a rate hike as the next move: more AUD support.

Having seen the ASX bounce back on the close to only be down -0.3%, we are currently calling the market down nine points on the 10am bell (AEDT) to 5375, however I believe that effects of the US and European markets have not been fully felt and it could slide further than this call. Crimea will again be the lead for trade today as the markets watch the futures markets to gauge European and US reactions to the developments in the Black Sea.

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