It is true; a thing is not a problem until it is. The Russia/Ukraine confrontation is now a problem. The US and its allies are now at war with Russia.
- Russia said on Wednesday it would ban all food imports from the United States and all fruit and vegetables from Europe, in a sweeping response to Western sanctions for Moscow’s support for separatists in Ukraine.
In this day and age, the above is war, serous war. US tanks will not roll and Europe will not send jet fighters to Moscow, but this economic confrontation could escalate causing much economic pain for both Europe and Russia, as well as some pain for the US.
Both the European and Russian economies are fragile right now. If this confrontation goes too far, Russia will suffer more, I suspect, as there are many other global food markets to which the US and Europe can turn. Nevertheless, switching markets can be costly for producers, which means the retaliatory measures Russia is applying will bite.
If I am right, though, and Russia’s economy suffers the greater loss in this war, a larger problem could arise. Often, when a country is on the verge of defeat, it resorts to employing its biggest weaponry. Russia is an oil and natural gas powerhouse and it provides both to Europe, primarily Eastern Europe, and if it feels it has no choice but to cut off supplies to Europe or drive up the costs to Europe forcing the affected countries to seek oil and natural gas elsewhere, then it just might do so. This could cause even greater harm to the lackluster European economy.
The problem with this scenario is that it is not as easy to switch markets for oil and natural gas. One needs major infrastructure to move both across vast tracts of land. If Russia decides to play its trump card, it would mean the loss of serious revenue to the government, the Russian economy would suffer big time, and the already stressed folks in Russia would be upset. And we know what the Russian people are capable of when they are upset.
All of this seems rather dire, and it should, as this is war in the 21st century, but the fact of the matter is that the market seems less concerned than Europe, the US, and Russia about the economic escalation.
The market is mixed this morning. Some indices are red and others green, but the more telling indicators are the VIX and the price of oil.
- Despite Russia’s importance as a producer, oil continued to slide too with U.S. crude Brent both at six-month lows at $96.69 and $104.36. per barrel respectively.
As I wrote at the opening, a thing is not a problem until it is, and as of now, Russia and where it sends its oil is not a problem, at least not for the oil market. This seems rather incongruous, to say the least. Given the military confrontations in the oil-rich Middle East, oil-rich Libya struggling with rebellion, and Iran struggling with sanctions, one would think oil prices would be through the roof with Russia now on the brink of using oil as a weapon.
Apparently, other issues are at play here, such as supply and demand. Could it be that Europe just might have negotiated an affordable “out” if Russia plays its oil card?
As to the VIX, well, this indicator tells us plenty about this war that has just exploded. The market overall is not really concerned, at least not at the moment. The VIX is in the upper 15 range, which is down from its high of 17.34 last Friday and it is down today, even as the Dow and the S&P are in the red. Could it be that this traders market is not indicative of the true market sentiment, meaning, the big money is not moving yet; it is waiting to see where all this turmoil of late settles?
So, as of now, the media is pushing the Russia/US/European economic war as the top reason why the market is not more upbeat, and there is some validity to the story, but, as I have pointed out, the market seems not to care as much as the media does. So, given that, here is a more interesting, upbeat story you can follow if you choose.
European Space Agency Reaches Verge of Breakthrough Comet Landing
Europe is just about ready to land a spacecraft on a comet and when it does, all sorts of questions about the origins of the universe might be answered, as that comet is frozen in a suspended animation state, and it dates back to the beginning, some 4.5 billion years ago.
Wow! The comet story is way more interesting than what the stupid people are doing to support their political aims. In the end, it might just be more important to the market as well.
P.S. The market just turned solidly into the red and the VIX crossed over the 16 line. Man-0h-man, it is hard to track this moment to moment.
Trade in the day; invest in your life …
