Why Does A Ukraine Crisis Impact US Equities?
Lately, the financial headlines are focusing on the crisis in Ukraine. What started as a government takeover has turned into a semi-occupation by Russia. The events initially spooked the equity markets – although they’ve since mostly recovered.
So why do investors care about Ukraine?
First off, we tend to hear a lot about issues in emerging markets, whether or not they have a direct impact on US companies. Some investors wonder why events in far away countries (with tiny economies) matter to a powerhouse such as the US.
Here’s the thing…
These days, investors are increasingly global investors. Emerging markets are an asset class used in many portfolios. If an asset class becomes too risky, investors will shift to other areas. This reallocation of funds impacts the entire market if it happens en masse.
Moreover, problems in emerging or smaller countries may often spill over into more developed nations. We saw this occur recently with Greece and Cyprus during the European debt crisis.
And that’s not all…
Ukraine isn’t some tiny, emerging market either. It’s of significant economic importance to the world.
You see, Ukraine is a major global producer of grains, particular corn and wheat. Moreover, 50% of the energy pipelines between Russia and Europe pass through the region. That works out to 15% of Europe’s total gas supply. That’s a big deal should it be halted.
Essentially, Ukraine is a major commodity producer with global implications should production be delayed. In fact, commodity markets are already substantially higher due to the crisis.
And as we know, commodity prices can and do have a direct impact on corporate profits. In other words, in the case of Ukraine, there is more than passing impact on US equities.
Fortunately, it appears Russia is taking a more reasonable stance on the situation. And, military conflict seems like it will be avoided. So far, the reduction in threat has calmed the markets to some extent.
Nevertheless, it may not be a bad idea to grab some cheaper, out-of-the-money calls on the VIX or VXX just in case the Ukraine situation becomes more volatile. Besides, it’s almost never a bad idea to use a little hedging now and then.
Yours in Profit,
Gordon Lewis
Category: Options Trading
