04.03.2014
The Ukraine
- a dangerous game
The crisis in the Ukraine may develop from being a regional conflict to an
East-West conflict.
We see the following two scenarios:
1) The basic scenario, which is the most probable one, involves new
turbulence in the emerging markets, particularly in Eastern Europe, but
otherwise only temporary effects.
2) The risk scenario, under which Russia will test the West's tolerance
threshold. In particular dependence on energy supplies will determine
to which degree the market will be affected.
Publisher:
Jyske Markets
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DK - 8600 Silkeborg
Senior Strategist
Ib Fredslund Madsen
+45 8989 7173
[email protected]
Disclaimer:
Please see the last page
If the crisis drags on, we may see uncertainty as to global growth. Particularly on the backdrop of the recent weak Chinese and US economic indicators.
Tensions relating to the situation in the Ukraine have grown over the weekend after, on Saturday, the Russian parliament approved the deployment of
Russian troops in the Ukraine. Therefore the situation in and around the
Ukraine is not clear, and there is a high degree of uncertainty.
Currently many factors are at play (political, military, economic factors)
with the potential of strong implications in the market. So far the most
visible financial consequence have been the weakening of RUB-related
assets. But depending on the development over the coming period, also
assets not directly related to the Ukraine or Russia will be affected. In this
respect, we assess that emerging markets will be the most vulnerable area.
Somewhat in line with what we saw in January for a period with risk aversion. With respect to the Ukraine, some events may be worthwhile keeping
an eye on: The reaction on the part of the EU and the US (trade sanctions,
military sanctions, etc.), the next moves on the part of the Russian and the
Ukrainian authorities (military moves, financial moves, agreement with the
IMF) and also the advanced referendum about Crimean independence (advanced to 30 March) and the possibility of escalating unrest in the Eastern
Ukraine).
Two scenarios
In the current situation, we see two scenarios. A basic scenario with the
emerging markets in focus, and a risk scenario, the 'test scenario', under
which the crisis escalates into a situation where the Russians test how far
the West will allow Russia to go. Energy prices will be the decisive factor for
global implications in this respect.
Oil price development
Brent Oil, USD/Barrel
Growing tensions
122,5
122,5
120,0
120,0
117,5
117,5
115,0
115,0
112,5
112,5
110,0
110,0
107,5
107,5
105,0
105,0
102,5
102,5
100,0
100,0
97,5
jan
97,5
mar
maj
jul
13
sep
nov
jan
14
Source: Reuters EcoWin
04.03.2014
Basic scenario: Emerging markets in focus
The unrest is now mainly at the regional level in Eastern Europe, but the
turmoil relating to emerging markets in January may be rekindled under
this scenario. Initially the consequences will be biggest for emerging market assets, but if we have a long-lasting period of turmoil relating to the
emerging markets, this may spread to the Western countries and question
global economic growth. And already, the strength of the economic growth
has been questioned due to the violent weather conditions in the US.
Equities under the basic scenario EM equities will be affected. Countries
with major banking activities in the region, such as Austrian banks.
EM under the basic scenario All countries will be affected, but energydependent countries close to the region and countries with large imbalances will be affected more severely. For instance Turkey.
The risk scenario: Russia is testing
Under the risk scenario, Russia is testing the Western world's tolerance
threshold when it comes to a Russian invasion. The West may consider
economic sanctions against Russia or military redeployment to send a clear
signal to Russia that she is about to cross the threshold. On the other
hand, Russia will consider playing the card of Russian energy exports.
As one of the world's largest oil producers and exporters, Russia will of
course be affected severely by a trade embargo if this materialises. But also
the EU is very vulnerable due to its strong dependence on energy imports
from Russia. About a third of the EU's energy imports come from Russia (of
this 32% consists of natural gas, 34% of oil and 27% of coal), and moreover
the Ukraine is the transit route for about half of Russia's exports of natural
gas to the EU.
Financial implications under the risk scenario
Commodity prices: Rising energy prices due to concerns about the reliability of supply. We have already seen, for instance, UK gas price go up by
10% Monday morning.
Equities under the risk scenario Generally falling equity markets, but relative differences. Due to its extensive nuclear power supply, France will
most likely do better than Germany as this country is in the process of
closing down its nuclear power plants. US equities will also perform relatively better (not necessarily in absolute terms) due to the country's large
own production of energy and the distance to Eastern Europe. Japan is one
of the large energy importers, and Japanese equities will therefore also be
affected more severely, particularly if the Japanese currency strengthens.
The Baltic countries also seem to be affected severely as they depend 100%
on energy imports from Russia. Banks with wide exposure to the Baltic
countries may therefore be affected indirectly, for instance Swedbank and
SEB.
On the other hand, we also point out that, for instance, the Czeck utility
company CEZ will be a winner under this scenario due to its nuclear-based
energy production.
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04.03.2014
EM under the risk scenario As under the basic scenario, just worse.
Currencies under the risk scenario The US dollar, the Swiss franc and the
Japanese yen will strengthen. The Russian rouble, the Polish zloty and the
Hungarian forint are some of the currencies that will be most vulnerable
(Hungary and Poland share borders with the Ukraine). The stronger the
scenario, the stronger the US dollar. On the other hand, the value of the
euro may fall as the EU is very close to the region and the EU's energy supplies depend very much on Russia.
Bonds under the risk scenario Investors will buy US and German government bonds as safe havens. Falling government bond yields; Denmark will
follow the development of German government bond yields.
35
1750
33
1650
31
1550
29
1450
27
1350
25
maj
jul
USD/RUB
aug
sep
okt
nov
1250
dec
11
Russian Index, MICEX
Index
Currency
Russian equities and RUB
12
Source: Reuters EcoWin
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04.03.2014
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