What’s next? The conclusion from Crimea’s referendum Sunday on whether to secede from Ukraine is widely believed to be foregone. In short, Russia will have effectively annexed Crimea, even if the territory doesn’t formally join the Russian Federation after the vote. The U.S. and EU have given ample warning to Russia of sanctions that could be announced as soon as Monday.
The economic damage has been substantial, this before weighing the impact from any sanctions. Will this restrain Putin from escalating the crisis further? Does he care, or does he in fact serve at the pleasure of the oligarchs?
As we outlined here last week, the damage can be clearly seen when looking at the ruble (which has fallen to a record low against the dollar) and Russian equities – the MICEX Index is down 1/3 from it’s 2013 highs, or roughly $80 billion (much of this hit has been absorbed by the oligarchs). Look closely at the price of oil, which spiked a few weeks ago as Russian troops took control of Crimea. Last week, something different happened when, in the wake of a Reuters report that the U.S. would make a “test” sale of up to five million barrels of oil from its strategic petroleum reserve, WTI plunged 2.3% in a day. The Energy Department said the sale, equal to less than 1% of the reserve, was “to appropriately assess the system’s capabilities in the event of a disruption.” In Barron’s this weekend, ISI is cited as reporting that Russia was the world’s largest oil producer last year, and that oil accounts for 20% of their GDP, over 70% of exports, and 52% of federal revenues.
As for China’s slowdown and the PBOC’s attempt to engineer a soft landing, watch copper this coming week. The industrial metal has been used as collateral for a carry trade that was predicated on the renminbi not appreciating, which it has done of late. The PBOC has tried to tamp down on speculative excess by weakening the currency, which has induced not only an unwind of the trade, but forced liquidation of collateral (hence the 10% drop in copper futures last week). Watch for more defaults on public bonds, as well, as this was telegraphed last week by Chinese Premier Li Keqiang.
Next week also brings the FOMC’s 2-day meeting. While few expect any deviation from the $10 billion/month taper in asset purchases, watch forward guidance for any changes to forecasts for interest rate. Every word in the FOMC statement will be closely scrutinized in light of the somewhat confusing economic data that some have attributed to the severe winter weather in much of the country.
In terms of major bourses most impacted by the geopolitical risk from Ukraine and economic collateral damage from China, look no further than Germany and Japan. While our markets suffered 2% losses, more or less, last week, Germany’s DAX and Japan’s Nikkei fell 3.2% and 6.2%, respectively. If selling pressure continues, it would be difficult for equities here to de-couple from those in the world’s 3rd and 4th largest economies.
Here in the U.S., interest rates have dropped as capital has sought a safe haven during the crisis in Ukraine, and with China slowdown looking more ominous that expected. Of course, this supports equities in several ways, including the low cost of debt capital that can support share buybacks. The acronym that has gained currency with stock traders, TINA (“there is no alternative”), is a direct reference to the meager yields offered in the bond market. While on its face the premise holds some validity, a downturn in equities will quickly induce more investors to seek the relative safety in fixed income markets. That would prove there is, in fact, an alternative to equities.
Even though the market’s forward earnings multiple sits just shy of a reasonable 16x, we note that a few of the seers we follow at Fusion have issued cautionary commentary of late, none more redoubtable than Ned Davis. Another firm we monitor closely on these pages is Jeremy Grantham’s GMO. In a Barron’s interview, Grantham said the market (the S&P 500) is all of 65% overvalued, though not close to a bubble. “So using the standard definition, it has to go up another 30% from here to get to a bubble.” His colleague Ben Inker, co-head of asset allocation at GMO, urged caution with a recent note suggesting there could be a bubble in small caps, however.
Here’s a summary of the coming week’s economic calendar:
Empire State Manufacturing Index; Industrial Production & Capacity Utilization; NAHB Housing Market Index
Housing Starts; Building Permits; CPI
MBA Mortgage Index; Current Account Balance; FOMC Rate Decision & Statement
Initial & Continuing Jobless Claims; Existing Home Sales; Philadelphia Fed Index; Leading Indicators
Of the companies reporting earnings for the week of March 17 – 21 some of the bigger names include:
- Pre Market - JASO, STRL, LMIA, TNP, KIOR, HNR
- After Hours - FF, DTSI
- Pre Market - HTZ, YGE, DSW, FDS
- After Hours - ORCL, ADBE, PSUN, RENN
- Pre Market - FDX, GIS, KBH, ATU, VRA, EVRY
- After Hours - JBL, GES, MLHR, CLC, TLYS, FNV, XONE
- Pre Market - CAG, BURL, LEN, CSTM, IHS, SCHL, MYCC, CATO, MCS
- After Hours - NKE, AIR, NWY, TIBX, SCVL, SLW, WTSL, RALY, AMBI
- Pre Market - CCL, DRI, TIF