| NEW YORK, March 3
NEW YORK, March 3 Russia's military move on the
Crimean peninsula has raised tensions between Moscow and the
West to levels not seen since the Cold War ended, but U.S.
investors are not yet ready to sell, duck or cover.
While Russian markets were hammered after the country took
control of the Crimean region of Ukraine, the moves were less
frenetic in Europe and even more muted in the United States.
The crux of the issue, analysts say, is the extent and
nature of an eventual escalation. If military action is involved
or Russian President Vladimir Putin is seen as too aggressive in
his demands, expect a further drop in Treasury yields and in
global stocks, at least in the short term.
Over a longer period, however, investors expect this issue
to cause only a modest selloff in U.S. stocks, mostly because
very little in the way of U.S. sales depends on Russian demand.
"If a civil war is avoided in Ukraine, and unrest remains
contained and does not spread, then much like with Syria last
September the issue won't go away but the impact on markets
should fade," said Jeff Kleintop, chief market strategist for
LPL Financial in Boston.
Russia's main stock index fell nearly 11 percent on Monday
and its central bank was forced to raise rates to defend the
ruble, which hit a record low against the dollar. A major
European index fell more than 2 percent, but Wall Street's
losses were limited.
Absent a war that pulls in numerous nations, even a military
conflict isn't likely to hurt markets too badly. Citigroup
strategists point out that the Iran-Iraq war in the 1980s, the
conflict in Kosovo and the Syrian civil war have had a limited
effect on stocks.
"The history of international conflicts having much impact
on US equities is very limited and thus a much larger conflict
would be needed to have considerable negative impact," Citigroup
chief U.S. equity strategist Tobias Levkovich wrote in a Sunday
Emerging markets-focused equities, which underperformed the
broader S&P 500 throughout 2013, are likely to keep feeling the
pressure, according to Citigroup. U.S. sectors that directly
respond to changes in energy costs or food inflation might be
more volatile if economic sanctions are imposed.
Monday's 2 percent run-up in Brent and U.S. crude
prices may be the start of a climb that could hurt the
already weak global economic recovery. Higher energy prices will
likely slow growth in the developed world, making the hit on
emerging economies even worse.
Economic sanctions that limit certain exports from Russia,
such as oil, would likely have a more detrimental effect on
Europe, which depends on Russia's supply of petroleum and
natural gas. Companies in North America that replace Russia's
exports of goods such as potash could benefit, said Robbert van
Batenburg, director of market strategy at Newedge USA.
U.S. large-cap exposure to the Russian market is limited.
Sales in Russia amount to about 7.4 percent of total revenue for
Pepsi, 3 percent for Alcoa and 2.4 percent for
Abbott Labs. Those companies could be affected by
sanctions, but lower bond yields might offset any weakness that
comes from reduced revenue from Russia.
Gold, the U.S. dollar and U.S. Treasuries rallied Monday,
typical of flights to safety.
"This looks very much like a chess game," said Kathy Jones,
fixed income strategist at Charles Schwab in New York.
"Putin made his move, and now how will the West respond? A
further move into Ukraine by Russia will continue to fuel
concerns and cause more safety bids."
Emerging market debt and equity funds last week are now on a
record-breaking streak of 22 and 18 straight weeks of
redemptions, according to BofA Merrill Lynch Global Research.
The situation in Crimea is likely to extend that trend.
"This reminds investors of the perils of investing in
emerging markets that don't always respect the rule of law,"
said Brian Jacobsen, chief portfolio strategist at Wells Fargo
Funds Management in Menomonee Falls, Wisconsin.
The flight from emerging markets that persisted throughout
most of 2013 could be amplified by Russia's moves in Ukraine.
That could also benefit U.S. stocks as well. With Monday's
selloff, the Standard & Poor's 500 index is still just a bit
more than 1 percent from an all-time high.
Investors have been pulling money from Russia-only equity
strategy funds. They had assets of $10 billion as of the end of
February, down from $16.8 billion in December, according to
preliminary Lipper data.
The MICEX index of Moscow stocks tumbled 10.8 percent
Monday. U.S.-based exchange traded funds that invest in Russia
naturally fell in tandem. The Market Vectors Russia
exchange-traded fund slid 6.9 percent, with more than 25
million shares changing hands, the most active day for the ETF
ever. At its session low it traded at levels not seen since
(Reporting by Rodrigo Campos; additional reporting by Richard
Leong, Sam Forgione and Angela Moon; editing by Andrew Hay)