U.S. Stocks Rise, Bonds Pare Gains on Easing in Ukraine
Comment of the Day

August 08 2014

Commentary by David Fuller

U.S. Stocks Rise, Bonds Pare Gains on Easing in Ukraine

Here is a sample of the latest update onUkraine, Russia and more importantly for markets, sanctions:

The Standard & Poor’s 500 Index rose, while Treasuries and the yen pared gains as signs that Russia is de-escalating tension in Ukraineoutweighed concern about crises in the Middle East.

Equity futures jumped earlier today after RIA Novosti reported that Russia seeks a de-escalation of the conflict in Ukraine. Stocks extended gains in the afternoon as Interfax said military exercises near the Ukraine border are over, citing Russia’s defense ministry.

Russia’s Defense Ministry said warplanes had ended drills in the region near Ukraine. RIA Novosti earlier reported that Russia offered to mediate between the government in Ukraine and the separatists that it’s battling. President Barack Obama approved airstrikes in Iraq, and rocket attacks marked the end of a cease-fire between Israel and Hamas. More than $1.8 trillion has been erased from the value of equities worldwide in the past two weeks.

“The market is looking abroad today--at Russia and Iraq, and with Russia it’s going to be a little bit of relief for the market rather than anything else,” John Manley, who helps oversee about $233 billion as chief equity strategist for Wells Fargo Funds Management in New York, said in a phone interview.

David Fuller's view

These statements suggest that Russia is not about to go surging over the Ukraine border with a massive military force in the next few hours or days, as some have feared.  The Russian Defense Ministry’s comment is a sufficient hint for some short covering and opportunistic buying following the recent setback from overbought and overextended conditions on Wall Street.  European stock markets, which remain particularly sensitive to Russian aggression and the increased sanctions that we have seen, paired today’s further losses before the close. 

Russia’s offer to mediate between Ukraine’s government and the separatists or instigators of this conflict could only have been authorised by Putin.  Playing the conciliator’s peace card shows Putin’s chutzpah.  It would also require a blank memory or extreme gullibility to be fooled by this.  However, it is Putin’s least costly strategy and he is obviously hoping to weaken Europe’s resolve over sanctions. 

“To jaw-jaw is always better than to war-war”, as Winston Churchill memorably said.  Putin knows that the US and Europe will not go to war over Ukraine.  However, they can assist Ukraine, with food, energy and weapons.  War would be expensive for Putin, not least as Western sanctions would also be increased.  Tough sanctions would eventually break Putin but at an economic cost, as we are already seeing.  Currently, one man’s ego, Soviet-style callousness and big military force, stands for further Eastern European oppression rather than peaceful economic development.   

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