Crimea vote to keep markets on edge

Reuters
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Traders work on the floor of the New York Stock Exchange March 14, 2014. REUTERS/Brendan McDermid

By Rodrigo Campos

NEW YORK (Reuters) - Investors will start the week early as the Sunday referendum to decide if Crimea becomes part of Russia or remains Ukrainian will likely reverberate in markets worldwide.

U.S. stocks closed Friday with their largest weekly drop in the last seven weeks as the strongest confrontation between Russia and the West since the end of the Cold War unfolds. Markets were also haunted by concerns over a slowdown in China's economy.

Dozens of Russians involved in Moscow's gradual takeover of Crimea face U.S. and EU travel bans and asset freezes on Monday as pro-Moscow authorities who have taken power in Crimea hold a Sunday vote to join Russia.

"There's an open question as to who suffers most," said Sam Wardwell, investment strategist at Pioneer Investments in Boston, about the planned economic sanctions.

"The EU is dependent on Russian natural gas; it's an economic mutually assured destruction."

This week's record decline in foreign holdings of U.S. Treasuries has led some to speculate that Russia has been cutting its dollar reserves ahead of possible sanctions from the West.

Moscow shipped more troops and armor into Crimea on Friday and repeated its threat to invade other parts of Ukraine despite Western demands to pull back.

"It will be harder to make a new high with these global and geopolitical effects overhanging," said Andre Bakhos, managing director at Janlyn Capital in Bernardsville, New Jersey.

"I don't know if these warnings signs result in dire results, but they are certainly to be considered when making a macro bet."

On Wall Street, despite the weekly decline the S&P 500 held near its record high. Investors, however, have been protecting their bets with other instruments.

The CBOE Volatility index VIX <.VIX> jumped near 10 percent to 17.82, its highest level since early February, as investors were willing to pay more for protection against a drop in the S&P 500.

"Maybe the average investor isn't acting worried, but I sure think option traders are bracing for some fireworks next week," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati.

The trading volume on spot VIX options was more than twice the norm on Friday, with the most active trades in the March and July 20 calls. The VIX has closed above 20 just one day this year, on February 3.

FED TO STAY THE COURSE ON TAPER

The Federal Reserve is also on investor's radars for next week as a two-day meeting of its policy-setting committee kicks off Tuesday.

The Fed could use the meeting, the first with Janet Yellen as chair, to map out its plan for rate rises, whether in the formal statement it issues afterward or in Yellen's news conference.

The Fed has telegraphed that the first rate rise is likely to come around the middle of next year, as long as the U.S. economy keeps healing.

"Our anticipation is the Fed will taper again maintaining the schedule they have. There seems to be a high hurdle for them to alter that schedule," said Pioneer Investments' Wardwell.

Recent weakness in economic data has been attributed in part to weather issues, and markets do not expect the Fed to veer its course of winding down its asset-purchase program by another $10 billion, bringing the monthly purchase total to $55 billion.

Market-sensitive data on tap for next week include housing starts and consumer inflation data on Tuesday and the Philly Fed survey, weekly jobless claims and home resales on Thursday.

(Reporting by Rodrigo Campos, additional reporting by Chuck Mikolajczak; Editing by Lisa Shumaker)

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