March 3 (Bloomberg) -- As Russian President Vladimir Putin’s threat to invade Ukraine intensifies one of the most serious standoffs since the end of the Cold War, traditional havens such as the U.S. Treasuries, gold and the yen are poised to gain while high-risk assets from stocks to emerging-market currencies fall.
There will be “knee-jerk reaction” across markets, according to Ambareesh Baliga of Edelweiss Financial Services Ltd. in Mumbai, while Mark Watts of National Bank of Abu Dhabi PJSC said investors will employ “the usual risk-aversion trade” in which the dollar and U.S. bonds rise at the expense of developing-nation stocks and currencies.
“It’s going to be a hectic day when markets open,” Abdul Kadir Hussain, who helps oversee $700 million as chief executive officer at Mashreq Capital DIFC Ltd., said in a telephone interview from Dubai. “You’re going to see risk aversion, which will probably mean that U.S. government paper will rally.”
At the end of a month in which global equities, bonds and commodities rose together for the first time since July and emerging-market stocks capped their best month since October, the crisis in Ukraine deteriorated as Putin won parliamentary backing to send troops into its southern neighbor. Ukraine, putting its forces on combat readiness, said over the weekend an invasion would be “an act of war” and U.S. President Barack Obama warned Russia not to intervene.
Markets in the Middle East have already reacted, with Dubai’s DFM General Index of stocks slipping 0.9 percent, the most since Feb. 23, to 4,184.37 at the close, while Abu Dhabi’s measure lost 0.3 percent.
The tension in Ukraine comes against a backdrop of improved global growth and U.S. corporate profits that have helped spur speculation about whether the U.S. Federal Reserve will speed the pace at which it tapers its bond-buying program. At the same time, concerns are rising about a slowdown in China and escalating political turmoil in countries from Thailand to Turkey to Venezuela.
The International Monetary Fund projects the global economy will expand 3.7 percent this year, up from 3 percent in 2013. Adjusted earnings per share beat analysts’ average estimates at 74 percent of the 488 companies in the Standard & Poor’s 500 that reported results for the latest quarter, according to data compiled by Bloomberg.
Crude oil and natural gas prices may rise on concern the friction will curtail energy supplies.
“The immediate future is one for higher oil and gas prices,” Saxo Bank A/S commodity strategist Ole Hansen in Copenhagen said. “We’re dealing with a geopolitical crisis. There’s a lot of risk in the market, so the likely reaction is one of caution and that’s probably going to take prices higher.”
European consumers of Russian gas probably won’t lack the fuel used for power generation and heating as a result of the crisis, since alternative supply routes exist and Russia needs the export income, Dubai-based consultant Robin Mills said.
“If there were a disruption, and there’s no sign of one yet, Europe is in a better position to handle such a situation,” said Mills, head of consulting at Manaar Energy Consulting and Project Management. “Ukraine is not as important a transit state for gas as it used to be. The Europeans have made a big push to develop gas storage and strategic interconnections between countries to allow gas to flow more easily where it’s needed.”
Ethnic strife erupted in Ukraine’s Crimea region, where the majority of the population is Russian, after an uprising led to last week’s overthrow of President Viktor Yanukovych.
Russian lawmakers gave Putin the right to send forces to protect ethnic Russians in Crimea after unidentified troops seized facilities in Ukraine’s southern Crimea region. Ukraine is on the “brink of disaster,” Prime Minister Arseniy Yatsenyuk said yesterday.
“If there is a flare up then we could see a knee-jerk reaction in the markets,” Baliga, managing partner of global wealth management at Mumbai-based Edelweiss Financial Services, said in a phone interview yesterday. “No one likes conflict between two superpowers. It has an uneasy feeling in the markets. It’s possible that investors will stay away from the markets until this uncertainty goes away.”
Benchmark 10-year Treasuries rallied last week, pushing yields down to 2.65 percent from 2.73 percent on Feb. 21. The yen rose 0.7 percent against the dollar 101.8, while the Bloomberg Dollar Spot Index fell 0.4 percent to 1,016.74. A Bloomberg custom gauge of 20 emerging-market currencies rose 0.19 percent, capping its first monthly gain since October.
The turmoil in Ukraine threatens to upend markets after a month in which the Bank of America Merrill Lynch Global Broad Market Index of bonds returned 0.6 percent, including reinvested interest. The MSCI All-Country World Index of stocks climbed 4.9 percent including dividends in February, its strongest advance since September, and the MSCI Emerging Markets Index jumped 3.2 percent, its first gain since October.
The Standard & Poor’s GSCI Total Return Index of commodities rose 4.5 percent as spot gold soared 6.7 percent.
Russia, which has offered citizenship to Ukrainian officers at bases in Crimea, according to acting Interior Minister Arsen Avakov, suspended a $15 billion bailout agreement last week that Putin and Yanukovych signed in December.
Ukraine’s new government, confirmed by lawmakers last week, wants as much as $35 billion in international aid over the next two years to avert a default. The U.S. and European Union have pledged assistance.
The crisis may have to escalate further before any sell-off of high-risk assets is sustained, Rami Sidani, the head of Middle East and North Africa investments at Schroder Investment Management Ltd. in Dubai, said by phone.
“It seems like the conflict is more of a power struggle that is contained within the Ukrainian border,” he said. “We don’t see any real impact on the global markets, at least not yet. It’s hard to speculate what’s going to happen next. But so far we don’t really see a systemic risk.”
Russian bonds and the ruble may fall as investors judge them most vulnerable to an emerging-markets sell-off, according to Hussain, who holds some of the nation’s sovereign and corporate debt at Mashreq Capital. The ruble declined 2.9 percent versus the dollar last month, the biggest drop among 24 emerging-market peers tracked by Bloomberg.
“The Russian space is going to be more fundamentally driven in the sense that I don’t think that that space has really seen the risk profile change,” he said. “Russia has always been involved in Ukraine, but now that it’s said that it won’t back down and has approved military action, that’s a whole different pattern.”
Increasing geopolitical risks may spur more demand for gold as a haven asset after futures in New York rallied 9.9 percent this year to $1,321.60 an ounce.
There’s “a bid under gold right now,” Alan Gayle, a senior strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees $50 billion, said in a telephone interview. “If you throw in the geopolitical risks that have been increasing, then suddenly, gold is likely to be a beneficiary of these geopolitical risks.”