Global stock markets opened in the negative aspect on the back of the latest news regarding the latest developments in the Ukraine. With the Russian troops having secured strategic positions in Crimea, the escalating tensions with the G7 alongside the Ukrainian temporary government most investors are feeling the dread particularly the ones wherein Russia has been pitted against the U.S. and Europe. In that case, its rather easy to deduce why stock investors were able to limit their exposure to risks today, with the FTSE 100 and DAX both failing between 1.4 % and 2.5 % respectively.
Should the DAX close lower by more than 2.55 %, it would be tantamount to its largest single-day decline since last year. By looking at the statistics of the conflict between Georgia and Russia nearly five years ago, wherein the pipelines and other hostile flexing of might, there were mostly fearing the risk aversion in currencies than stocks which would result in additional danger for purchasers for buyers of sterling and the euro.

A look back at the Russian-Georgia conflict: Cautioning FX risk

For nearly five years, when the climactic tensions between Georgia and Russia culminated, the stock markets initially suffered relative weakness. The global indices including the FTSE 100, Dow Jones and S&P all lost well over 2 % worth of losses in the span of a 48 hour trade. However, as terrible those times were all the indices were able to recover before the ceasefire which was later announced thereafter.

FX risk off

The fundamental reason behind as to why there wasn’t much time when the case of a bullish Swiss Franc and Yen could be further grounded. Investors in stocks and risk-on currencies are looking for other asset classes in recycling funds. Aside from the defensive stock sectors, the Japanese yen still remained to be the most bullish of all the major currencies year to date. Moreover, gold has also experienced demand in the last few trading days as an optional asset class for the flow of risk off funds.

Crisis in the Ukraine

The present conflict in the Ukraine still remains to be the primary focus of the markets not in terms of what is presently happening, but for the potential of what could actually happen. Ukraine itself is tipping into a possible civil war and the Russian military has already taken control of the pro-Russian Crimean region which complicates things since it contains one of the major naval bases of Russia.

The crisis has a rather similar characteristics that of the Russian-Georgian conflict several years ago. The global response of the aforementioned conflict insinuated a tough rhetorical action from the western nations and the U.N. in general. The result is that it will be difficult to appreciate the so called “bluff” by Russia with the definitive action to restrain its military movement in Crimea.

A question therefore that needs to be answered is whether or not stock investors should be concerned? Indeed the honest answer would be yes.

The possibility of the present situation to deepen and intensify the situation remains at large. Russia is known to be a country as unpredictable and aggressive and quick action remains to be unwavering.

The reaction of the G7 is essential. It’s difficult to see at this point with Russia holding all the aces for the west to significantly do anything other than pacify the Russian aggression.
A quick examination at the prices of oil reveals the impact of the present conflict. Oil prices are expected to rise and sectors that rely heavily on a stable oil price to keep the fundamental costs at a minimum will be directed to the ability of the stocks to actually rally in the near term.

Key indices hit major resistance levels which will result in the need for a 5 %-10 % market correction. Generally, market corrections are healthy for the long term bullishness or major indices, but with the FSTE 100 and others all hitting levels which are sparked by selling, even the slightest price correction could be overdue.

Last Updated: March 10th, 2014