Russia essentially invades Ukraine on Friday, so financial markets are reacting strongly this morning. A few general themes from the overnight price action:
1) Equities lower, Europe more than Asia. Notable that the biggest losers (aside from Russia, down around 10%, for obvious reasons) in each region so far this morning have been the big winners over the past couple years – Japan in Asia, and Germany in Europe. The Euro Stoxx 50 index breached its 50 day ma (3087) for the first time since mid-Februray, while the Nikkei and Hang Seng held their 200 day ma’s (14500 and 22500 respectively).
2) Bond Yields lower. The U.S. 10 year yield hit its lowest level since early February overnight. The 2.50% level is a big, big technical spot to watch in the coming weeks. In Europe, peripheral bonds are underperforming while the safe havens (Germany, Sweden, etc.) are outperforming.
3) Commodities higher. Not just oil, gold, and silver either (which are all up 1-2.5%). Grains are significantly higher as well (wheat is up almost 5%), and it’s worth noting that U.S. gasoline is at its highest level since the summer of 2013.
Dan had a prescient post on Thursday detailing the potential for geopolitical risk related to Ukraine:
My sense is that for some odd reason, risk assets are not pricing the potential for a showdown in the Ukraine. And this is at a time when U.S. / Russian relations are as bad as they have been in many years. The question is, what are the ramifications of armed conflict?
First, the Ukraine defaults and aid could be hard to come by as Russia is not going to pump billions into Kiev while the West is supporting the Revolutionaries. U.S. Treasuries are probably the best trade from the long side. Despite the relative cheapness of Russian equities, they probably finally make a new low after hovering above 5 yr support (5yr chart of RSX, the Market Vectors Russia etf):
RSX 5yr chart from Bloomberg
And then what are the reverberations for other emerging market currencies if and when Ukraine defaults on its debt??
Do we see a spill over into other emerging markets like Turkey that have been battered now for months and do we see a re-ignition of the emerging market fears that caused the volatility in global markets in January into early February? Is it time to re-short EEM using a $40 stop on the upside?
Or maybe the better risk/reward trade is to simply play for increased volatility with a cheap VIX structure like the one CC and Enis laid out last week.
The Russian Ruble did indeed make a new all-time low vs. the USD overnight. And a put position on RSX would have been the best protection (which Henry Hindsight nailed as usual). Pre-market, EEM is down about 2%, while March VIX futures are up about 1.25, to the highest level since early February. With the S&P 500 down almost 1% pre-market, the 1850 level will be crucial to watch , while the 1820 level on the downside is the 50 day moving average.