Situation in Ukraine Reaches a Boiling Point

Market Digest – Week Ending 3/14

Stocks retreated as investor’s looked to remove risk ahead of Sunday’s vote in Crimea which will determine whether the majority ethnic-Russian region secedes from Ukraine and joins Russia. The US and EU are promising sanctions if Russia moves to annex the region. Meanwhile, economic data out of China continues to indicate a potentially sharper and steeper slowdown in growth. International stocks lost more ground than domestic. Treasuries and gold increased as money shifted into safer assets.

Weekly Returns:

S&P 500: 1,841 (-2.0%)
FTSE All-World ex-US: (-3.2%)
US 10 Year Treasury Yield: 2.65% (-0.13%)
Gold: $1,383 (+3.1%)
USD/EUR: $1.391 (+0.3%)

Major Events:   

  • Monday – Chinese exports fell 18% in February, much worse than expected.
  • Tuesday – After months of competing bids to acquire each other, Men’s Warehouse announced it will buy Jos.A. Banks Clothiers for about $1.8 billion.
  • Tuesday – China’s central bank said it intends to remove interest rate restrictions on bank deposits within two years.
  • Wednesday – The Federal Trade Commission opened an investigation into Herbalife, the maker of nutritional supplements.
  • Wednesday – Top members in the Senate and the White House agreed on a framework to wind down mortgage giants Fannie Mae and Freddie Mac and overhaul the nation’s $10 trillion mortgage market. The language implied common stock shareholders would not be rewarded for the huge profits the firms are now generating. The agreement still has a long way to go before being accepted.
  • Thursday – Stocks fell as China released softer than expected industrial output numbers and fears increased surrounding events in Ukraine.
  • Friday – Nonfarm payrolls rose by a seasonally adjusted 175,000 in February, exceeding most estimates. Still, the unemployment rate rose to 6.7%, from 6.6%.

Our Take:

This is one of those interesting Fridays where there is a high likelihood something material happening over the weekend. The situation in Ukraine is likely to start advancing more quickly. It is difficult to handicap, but it seems the most probable scenario following Sunday’s vote is that Russia moves to annex Crimea and the West imposes some kind of sanctions.

This would pretty much set us all the way back to a formal adversarial relationship with Russia, making meaningful economic cooperation difficult ahead. This could cause a temporary speed-bump for the global economic recovery, especially for a fragile Europe if energy prices increase. But it would be particularly devastating to Russia to return to a more isolated position. The Russian economy is not well equipped to generate growth on its own, at least relative to the rest of the world. Long term, it is a bit scary to think about a very proud and powerful country having to watch the rest of the world grow even richer still.

 


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