“Peaceful” Russia Remarks Offer Some Respite to the Markets, Reports About new Clashes are Crucial for Demand for Risk
Market’s reaction to the Russia decision to recognize the DPR and LPR was somewhat tepid, with the exception of Russian equities, which tumbled 20% on Monday. Today Russian stocks opened with a gap down, but turned to recovery in the second half of the session. Chances of a large-scale conflict have decreased after the Russian Foreign Ministry said today that:
- Russia recognizes the DPR and LPR within the current borders of power (and not the borders of the administrative regions of Donbass and Lugansk within Ukraine).
- Russia is not going to send troops to the territory of the republics without a reason, only in case of a threat.
The second statement means that it will be more difficult for the West to use the rhetoric about invasion, which trims the risk of the most serious sanctions.
On global markets there are signs of a gradual exit of investors from safe havens: the dollar and the yen decline, yields of 10YR Treasuries and Bunds bounced up, gold erased half a percent dipping below the $1900 level. One gets a feeling that markets are making their first tentative steps to price in a gradual de-escalation.
Oil prices post mixed performance, some weakness could stem from the upbeat reassessment of possible shocks in Russian energy supply due to Ukraine conflict. There was also a technical signal for prices to go lower as Brent prices almost hit a $100 round level on Monday trigger profit taking as well as speculative sell-off.
Broad rise in prices in the commodity market indicates that imbalances between supply and demand persist. The Bloomberg Commodity Price Index (BCOM) has gained 19% since the beginning of the year:
Much of the uncertainty will be eliminated once the US andEU announce sanctions and markets assess the risk of Russian retaliation. Inaddition, demand for risk assets should remain quite sensitive to reports ofnew clashes in the Donbass and Lugansk region, which will most likely lead tothe entry of Russian troops into the territory of the republic, which mayentail new large-scale sanctions from the EU and the United States as aresponse to the Russian invasion.
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