What also escalated overnight is that Israel mounted a ground assault on the Gaza strip. After ten days of aerial assaults from Israel, and two proposed ceasefires being ignored, this was a near certainty. The assault is also likely to see Israel holding the Gaza strip for a considerable period of time and will see tensions in the Middle East.
Markets have responded as expected, the US experienced an immediate and sharp reversal and logged its worst trading day in three months. Gold, US bonds and yen all strengthen as investors moved into safe-haven assets. This also saw the largest intraday move in the VIX index since April last year - the index added 34% and is likely to continue to rise as markets look to protection due to the uncertainty.
We expect this negativity to continue throughout the Asian trading day and into the European session tonight; how hard the fall amounts to will depend on the reaction of Europe, Russia and the US over the coming week.
The downed flight will also pose a geo-political and geo-economic flash point. Currently the US has the strongest sanctions on Russia over the conflict in Crimea and eastern Ukraine. Under the current situation Russian companies have limited to no assess to US debt markets and it is why Russian corporate issuances and corporate bonds have being skyrocketing. The US has also frozen the assets and capital of those with the closest links to the Russian President, leading to fiscal sluggishness and slowing trade.
Over this time Europe has resisted calls from the US to impose similar sanctions considering the economic ties. However the horrible event of last night brings Europe into play. The majority of the passengers were Dutch, if Europe now responds with similar or even stronger sanctions it would cripple the Russia’s ability to access capital markets entirely.
Russia’s trade with Germany, France and Italy is around one third of all foreign trade and Europe as a whole is over half or all trade. Sanctions from Europe would see the Russian ruble and Russian equity market experiencing mass volatility and a mass slide - this has already begun and further talk from political leaders of sanctions will see the Russian markets under immense pressure.
Ahead of the Asian open
The events of the past 24 hours will dominate trade today. Japan is due to release its monetary policy minutes however this will have a minimal effect on theyen - it is likely to see strength for safe-haven reasons rather than signs the BoJ is continuing with this current settings.
We are currently calling theASX 200 down 27 points at 5494 on the tensions. However there was a bearish signal developing yesterday in Australian trade. When the market hit the 5540 level there was a sharp intraday reversal and does show that the bear will defend this level with increasing vigour having tested this level three times in the last few months. This will be a level to watch over the coming months and one that is likely to hold has fundamental kick in.