Russian oligarch peer pressure

It appears that it took the negative move in equity markets on Monday to knock some sense into the global leaders, as the Dax fall over 3% and the FTSE 100 nearly 1.5%. The S&P 500 was the best behaved being down just about 1%. The Russian stock market took an even worse battering falling over 10%, and with it went the Rouble, which led to a rise in Russian interest rates. According to Bloomberg's billionaire index, Monday stock market moves cost Russian Oligarch's $13bn. I imagine that President Putin's mobile phone would have been ringing with some pretty disgruntled investors at his recent actions.

Tuesday has seen a recovery in global equities as the rhetoric from both sides seems to be more conciliatory. There is beginning to be a realisation of how damaging to the West a dispute with Russia could be if it imposed some of President Obama's "costs". It is probably a moot point who would find the cost greater. Post the breakup of Communist Russia, the Western and Eastern economies are probably far more intertwined than at any time in the past 100 years, both sides have a lot to lose should the dispute escalate. It would appear to be dawning on both sides that it is in both their interests to find a sensible diplomatic conclusion to the situation.

I always look to see how other asset classes behave in times of stress. In moments of risk aversion investors tend to run for US treasuries, this leads in turn to a strengthening of the US dollar. US treasury yields hardly moved and remain close to the recent levels, as does the dollar against its basket of other currencies, suggesting no real panic. The Japanese yen, another currency you expect to see strengthen in times of risk aversion, hardly moved. The Vix, our fear gauge, rose as you would have expected it to, but considering it trades close to historic lows, I would consider a rise of 10% fairly modest. The Vix closed at 16 on Monday night, still below the level it reached at the start of February. The oil price rose (as one would expect considering Russia is responsible for 10% of the global oil supply) as did the wheat and corn price. The gold price also tends to rise in times of heightened risk aversion, as investors look to real assets, but at $1338 an ounce gold remains close to its recent trading range.

I am a great believer that crisis always bring opportunity. These types of events are not one an investor can plan for or react to with any real confidence. What one can only expect to do is sit tight, hope that common sense, as it usually does, prevails amongst the leaders and wait for the situation to resolve itself. One thing I would imagine is fairly certain, any notion that the UK or US are in the mood to raise interest rates in the near future are going to be put on the back burner.

Posted on March 5, 2014 .