British foreign secretary William Hague has termed the recent events in Ukraine as the "biggest crisis in Europe in the 21st century".
However, one does not have to be a geopolitical expert to fully comprehend the implications of the crisis on the financial markets. Markets hate uncertainty and almost always overshoot to levels which are not justified by any fundamental metric during such "crisis" times.
So far Russia has only acted on Crimea, a semi-autonomous region in Ukraine with a large Russian population and major Russian naval assets. Further, Ukraine's newly appointed prime minister, Arseniy Yatsenyuk, pointed out that although there is little chance of resolving the standoff in the short term, there has been no evidence of Russian forces trying to push out of the Crimea region into mainland Ukraine. Yatsenyuk believes that the worst phase of the crisis has passed, the Wall Street Journal reported.
But the mood for Monday's trading session was guided solely by risk aversion. The dollar, a safe haven currency, rallied nearly against all the other major currencies. The British pound and the euro ended sharply lower.
This is on the back of last weeks European Central Bank (ECB) monthly monetary policy meeting, at which Mario Draghi, the ECB president, gave no hints of a rate cut in the near future (a 25 basis points cut was widely anticipated by the market). This is supremely bullish for the euro, which can reach fresh yearly highs if some sort of peaceful agreement is reached between Ukraine and Russia with the mediation of their western counterparts.
Gold, which has already been inching higher in the past couple of weeks, rallied by more than 2 percent and finished above $1,350 an ounce. This is the typical 'fear' trade short-term speculators in the gold market love.
The Eurex Vstoxx, a volatility index which signals the expected short-term market volatility also moved up to 20.1 from a close of 18.9 on the previous trading session. The weak data out of the US (which is factoring in the severe winter) has pushed up gold since the beginning of 2014.
In fact gold has had the best start to a year since 1983. However, the US economic data a few weeks from now will be for months in which manufacturing activity was not affected by the severe weather conditions. There is a strong possibility of a positive uptick in data which would be negative for gold prices. Further, there has been no change in language from Janet Yellen and other Federal Reserve governors and the tapering of the US Quantitative Easing programme remains on track at $10 billion per month. These factors may lead to gold correcting from current levels to around $1,250-$1,300 levels.
On the commodities front, it is important to note that Ukraine is one of the world's largest exporters of corn and wheat. The biggest moves, however, have come in oil. Both the global benchmarks, the WTI and Brent, reached fresh yearly highs on Monday's session. Russia supplies a quarter of Europe's oil, half of which is pumped via pipelines running through the Ukraine and if the conflict leads to an energy supply shock, oil prices would rise. This is now being factored into the oil prices. WTI crude has also been moving up on weather related plays. If this crisis is soon subdued, oil prices could easily drop by another $5-$6.
A lot swing and reverse trading opportunities now exist in the markets. However, one should not jump into these trades and stay on top of the latest developments in Ukraine. As soon as things start to cool down, one can start shorting gold and oil while buying the euro against the dollar.
(Vatsal Srivastava is a senior market analyst. The views expressed are personal. He can be contacted at vatsal.sriv@gmail.com)
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