Is Wall Street right to ignore Ukraine?
The sometimes-violent fracturing of Ukraine has commanded international headlines, evoked scary comparisons with Cold War-era diplomatic chess games and spurred the White House to send Vice President Biden to Kiev, in a bid to calm the crisis.
So why are global financial markets mostly shrugging over the geopolitical drama?
Sure, the Russian stock market (RSX) and the world value of the ruble (RUB=X) have been hammered as Western economic sanctions take hold. Potential disruptions of Ukrainian grain shipments have lent force to the rally in some agricultural commodities. And Continental Europe is bracing for potentially crippling constraints in Russia’s crucial natural-gas exports.
Yet, on the whole, stock markets have registered little alarm over possible economic and geopolitical ripple effects from Russia’s de facto annexation of the Crimean region and apparently building risk of all-out civil war in Ukraine.
Even when U.S. stocks hit an air pocket in recent weeks, fanning talk of a long-awaited downside correction, the damage was concentrated in high-expected-growth Internet and technology stocks – areas of the markets least exposed to global trade flows and industrial activity.
There are a few reasons for what might appear the counter-intuitive steadiness of world markets given the unsettling aggression in Russia’s stance and the potential dissolution of a democracy adjacent to the European Union.
--As I discuss with Yahoo Finance Editor-in-Chief Aaron Task in the attached video, investors these days tend to operate on a “need-to-worry” basis, registering alarm only when geopolitical crises pose an immediate threat to economic growth, private-sector industrial activity or commodity supplies.
A list of recent crises that seemed ominous at the time appear in retrospect as distractions with few broad economic implications, with the Arab Spring and Syria’s civil unrest the most prominent examples.
Few bear markets are traceable to a sudden political or military threat, this side of World War I. Stocks did great in the 1950s and ‘60s, when nuclear annihilation was considered a sometimes-imminent threat. Even the market drop after the 9/11 terrorist attacks are most properly viewed, more than a dozen years later, as a relatively fleeting shudder of fear that hit in the middle of a much larger 30-month bear market.
When little Cyprus had a banking crisis in early 2013, global markets were shaken – but only because it magnified latent fears that the entire European currency regime was vulnerable. And once that worry past, Cyprus quickly became a shorthand Wall Street punch line for “fake crisis.”
--It’s inherently difficult to draw causal links from geopolitics to market action. The very idea that world markets have paid little heed to the Ukraine drama presupposes that we can know where they would have been trading absent the events there.
Is it possible risk appetites and stock prices would have been higher without the sobering headlines and new evidence of Vladimir Putin’s expansionist, West-defying inclinations? Have the recent rally in Treasury bonds and jump in gold prices from $1,200 toward $1,300 per ounce since January ben partially about Ukraine tensions? Maybe; it’s impossible to say for sure.
Might the next downdraft in stocks coincide with some nasty turn in the Ukraine standoff? Why not? But in that case, the events on the ground will likely be just a handy headline excuse for a bout of volatility that might’ve occurred anyway.
--The conceivable nasty economic outcomes are still unrealized. For now, Russia has not withheld its natural-gas supplies and the civil unrest hasn’t yet threatened other countries. And even if trade restrictions become yet another headwind to a fragile European economic recovery, investors have become used to the stop-start nature of the Continent’s post-crisis convalescence.
Don’t forget, too, that investors have been conditioned to view economic threats as the mere precursors to ever more aggressive feats of central-bank easy-money responses. With European Central Bank officials now being viewed as eager for fresh reasons to get more aggressive to fight deflationary pressure, a drag from the Russia-Ukraine tensions could be run through investors “bad news becomes good news” psychological alchemy process.
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