Eastern Europe pushes the panic button

On Monday I suggested there was an interesting divide emerging in the major macros affecting global markets. 

Source: Bloomberg

The three themes were:

  1. The Fed still in the driving seat of the US economy and markets.
  2. Russia’s potential response to Europe and US sanctions over Ukraine.
  3. The Persian Empire’s flash crises from Iraq to Libya, Iran to Syria, putting pressure on oils prices.  

Markets overnight were moving along in a fairly routine fashion, after having seen slightly positive data from Europe and the US. This lead to Europe recovering from four days of losses and the US market moving slightly in the red after having rallied on Monday.  

However, this reversed very quickly on comments by the Polish Foreign Minister Radoslaw Sikorski that Russia was amassing forces on the Ukrainian border which could lead to a possible invasion of the eastern part of the country.

The comments saw the DOW and S&P take a sharp turn for the worse, which only accelerated as President Putin ordered his government to prepare for a response to the sanctions imposed by the West.

This is an interesting development; expectations were that Russia may bide its time over Ukraine and let tensions reduce before trying to reassert its presence in the country. However, this looks less and less likely now.

If Poland is indeed right that Russia is about to increase its presence in the east of Ukraine, buyers of all things risk will disappear fast as this is an undefinable event with an undefinable outcome for markets. The energy sector was the hardest hit and this will be the sector to watch over the next few days as more information flows out of Europe around Russian military positioning.

The externals to market macro events of the next four months are building and all are constant reminders that the complacency of the past four months is likely to end. I remain tactically long the VIX as these events are only going to positively impact volatility.

What is also now becoming a real scenario for downside risk is European energy consumption. If oil supplies from North Africa and/or the Middle East are disrupted in any way coupled with Russia’s likely response to sanction (bottle necking of gas supplies), Europe is going to find energy fuels in short supply heading into its winter months. The DAX in USD terms is now in a technical correction, with the MIB not far off in USD terms since the June peak. France, Germany and Italy are highly leveraged to Russian energy; the question is who will blink first.

Ahead of the Australian open

Only two pieces of data are to be released in the Asia Pacific region during Asian trade today, and that is employment data from New Zealand and the leading economic indices from Japan. However, markets are likely to ignore these and focus on reactions to macro events from overnight.

The AUD continues to revert to the 93 cent handle after a fairly muted RBA statement which signalled it too is watching wage inflation, which is now the theme from central banks the world over, and is likely to see rates on hold for longer. We are calling the ASX 200 down 0.4% to 5497, which would be a two-and-a-half week low.

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