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 note.
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 2009. (Reporting by Rodrigo Campos; additional reporting by Richard Leong, Sam Forgione and Angela Moon; editing by Andrew Hay)