Investors reel as Russia-Ukraine tensions escalate

The renewed turmoil is sending ripples through the bond market and European stocks.

By InvestorPlace Aug 15, 2014 5:46PM

Credit: © Yuri Kocketkov/EPA
Caption: A Russian convoy carrying humanitarian aid for residents in rebel eastern Ukrainian regions moves along a road about 50 km from Voronezh, Russia.By Anthony Mirhaydari

Stocks came under pressure on Friday as the situation in Eastern Europe kicked up a few notches.

With Russia's near 300-truck-long "humanitarian" convoy parked near the Ukrainian border, British journalists reportedly witnessed a convoy of Russian military vehicles -- including 23 armored personnel carriers -- cross into Ukraine.

Ukraine said it destroyed part of this convoy. Russia denies sending anything over in the first place.

The renewed escalation of tensions has stocks on the slide again, threatening to put an end to the two-week rebound the market had been enjoying. The situation on the ground remains in flux, with Ukrainian border guards apparently inspecting Russia's aid convoy in preparation of the move across the border. But confusion reigns.

So further escalation looks likely before this is all done, which comes at a time of vulnerability for the economy and markets.

Stocks at a turning point

For stocks, the day's headlines have pushed the major averages back below critical technical support levels with the small-cap Russell 2000 Index moving back below its 200-day moving average, a level it has been mired below since late July.

Breadth measures also suggest that the situation is on tenterhooks. The percentage of Standard & Poor's 500 Index ($INX) stocks that are in uptrends has moved down near 71 percent -- a drop from a high of around 85 percent back in mid-July -- but still is above the lows of 65 percent and 62 percent hit during the February and April selloffs.

The Russia situation could be the catalyst the market needs to get a nice, deep oversold condition that it can rally out of.

Bond market nervousness

Over in the bond market, the yield on 10-year Treasury notes has dropped to 2.3 percent -- levels that haven't been seen since June 2013 -- as traders seek a safe haven. This is a big deal, since it nearly reverses the backup in yields seen during last year's "taper tantrum" related to former Federal Reserve Chairman Ben Bernanke's warning that the QE3 bond purchase program would soon start being rolled back.

Now that we're just two months away from QE3 ending entirely, the drop in yields suggests that the economy and the markets won't be able to handle it.

In fact, the relationship between the drop in yields (and the rise in bond prices) vs. stock prices is falling at a pace not seen since the summer of 2011 -- just ahead of the August 2011 market wipeout that, to date, has been the biggest correction of this bull market so far. If the tensions between Kiev and Moscow worsen, bond yields should continue to drop (as prices rise) with stocks suffering as a result.

The global economy

And while the economic data here at home has been strengthening, with signs of tightening in the job market, it hasn't been the same story overseas. Economic releases out of Europe, China, and Japan have all disappointed this week. And this slowdown has been corroborated by the weakness we've seen in economically-sensitive commodities such as crude oil and copper this week.

West Texas Intermediate Crude dropped to $95.50 a barrel on Thursday, a low not seen since January. Copper, as represented by the iPath Dow Jones-UBS Copper Subindex Total Return ETN (JJC) returned to June levels.

The problem is that economic sanctions against Russia could boomerang back to Europe and deepen the eurozone's economic woes. This comes despite the fact that the European Central Bank just cut its policy rate into negative territory. Moscow's decision to ban food imports is deepening Europe's deflation problem, a sign that Russia understands exactly where it can apply maximum leverage.

As a result, the iShares S&P Europe 350 Index (IEV), shown above, has dropped below its 200-day moving average in a significant way for the first time since May 2012.

What comes next, and how to play it

According to analysts at Stratfor, while Ukraine's forces have made progress against pro-Russian separatists, they are spread thin and are vulnerable to a counterattack should Russian forces (as is feared) make an overt push into the territory.

Another potential flashpoint comes from reports, cited by Stratfor, of the alleged separatist capture of pro-Kiev fighters planning an attack on Russia's humanitarian convoy. Tensions are rising as Russia keeps stockpiling forces on its side of the border with more than 20,000 troops estimated along with airborne forces, battalion task groups, and air defense systems.

The most direct way to play a worsening of the situation is by betting against Russian and European stocks. I've already recommended the Direxion Dailly Russia Bear 3x Shares (RUSS) to my Edge clients on July 17, with the position up 4.1% after trimming profits at a 10 percent gain back on July 30. Another idea would be the ProShares UltraShort FTSE Europe (EPV).

More from InvestorPlace

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm. As of this writing, he had recommended RUSS to his clients.

Aug 16, 2014 5:43PM
I doubt it. People are numb to violence around the Globe.
Aug 17, 2014 8:52PM

Let's see you got the Ukraine, birthplace of Nikita Khrushchev, with a military budget of $7 billion a year versus Russia with a military budget of $70 billion a year. You got the EU and US which set up the state of Israel for the Jewish separatists in land stolen from Palestine. The US uses the hypocrisy that it was originally Jewish  land 2,000 years ago while the US occupies American Indian lands.


I think Russia should invade Eastern Ukraine and take back what is rightfully theirs and tell the EU and US to take a hike. The EU and US have taken over Ukraine with the same democracy based socialism that's destroying the US after having been infected by the EU.  Might as well get it over with since China and Russia aren't going to put up with western socialism infecting their countries anyway.

Aug 16, 2014 1:02PM
Ukraine should destroy any Russian truck that enters their country without first being inspected by a neutral third party.
Aug 15, 2014 7:02PM
This week we learned that The eurozone saw 0.0% growth compared with the first quarter. Germany GDP contracted by 0.2% in the three months to the end of June. Italy, the eurozone's third largest economy, fell back into recession. The French economy saw no growth in the quarter.

Japan's economy contracted the most since the record earthquake at an annualized negative  -6.8 percent. The amount of money flowing into China's economy slowed to the lowest level in nearly six years  Puerto Rico still has a massive debt crisis looming.

Yet at the end of the day, we are told that the Nation with the Most DEBT and the biggest appetite for CRUDE is the best place to invest. All this robbing Peter to Pay Paul always ends badly. We can't just keep building bigger Bubbles on to top of the Old ones.

Aug 16, 2014 9:14PM
There are 300 trucks full of humanitarian aid goods lining the highways in the Ukraine, but ordinary Americans are now earning less than $24,000 annually because of alumni job blockading and garbage GOP management with major egomaniac and psychopathy problems. Why aren't trucks lining up in every city town and village in America to help ordinary Americans? It's because this is all FAKE. 
Close the banks, end the Federal Reserve and get RID of Wall Street. Eat the rich, they are tender and moist. Who designed all this, and why aren't they in a padded cell somewhere? 
Aug 16, 2014 9:09PM
None of the politico-war fronts matter. People across the globe know that the REAL war is against money-grubbers, central banks and inherited business platforms. 
We should be at a complete standstill by September 15th, give or take the influence of all the fake money sloshing around. The G20 is a roster of dead nations reliant on financial manipulation, not real economies. 
Whether the coming war seizes the wealthy and destroys them as vermin or simply exits this false financial racket- creates one that actually supports real economy and sticks grubbers with the bill for the debt they usurped through rigged investing- is yet to be determined. 
If I yelled through a megaphone at the no-man's land between Russian and Ukrainian troops that the REAL world would arrange coordinated commerce and thus jobs to restore economy in both lands... the troops would drop their weapons and listen. These wars aren't about power, they are about survival and without grubber money fueling anger and frustration from corruption around the world, there would be prosperity.
You are going to die, rich people. It's an inevitability. Try the high road once in what's left of your lives. It will be new and exciting because you've never been on it before. You are scum. 
Aug 18, 2014 10:30AM
I'll tell you what Anthony when the markets are ready to roll over I'll let you know.  In the meantime you can keep your eyes on three variable before that will happen.  Firstly Obama is a Socialist Marxist no matter what propaganda comes out of that corrupt crew he surrounds himself with.  What this means is they will protect the moneyed class to keep them quiet until they no longer need them and then pull the rug out.  Secondly the manner with which they insure their being tolerated is to maintain FED commitment.  This is done in two ways.  The first being low interest rates that mean nothing but code for we are with you as noone is really investing in anything but themselves in America any more. The second is to maintain these trillion dollar a year deficits which in mass only benefit the uber rich and their followers.  The amounts spent on food stamps and welfare is a pittance and only attempts to avoid social calamity.  The third is the totally insane loans made by the International banks to the Chinese.  This is the achilles that will end everything American.  You know all that FED money went to emerging markets to build roads, bridges and ports, to bring that cheap crap to America and lower American Lifestyles and wages to comply with the New World Economy these uber rich think they can pull off.  The problem is the Chinese have a 5000 year old culture and as soon as the American money is gone they will never ever pay back the loans and will require another 20 trillion in fake money to keep what is left going. We are beginning to see social unrest build at home. The bottom line is Americans are being confined by a system that is designed to only benefit the rich and entitled and this will not stand. We only see the  Black kids standing up for the oppression so far but until the white kids and Asian kids get involved and stand up and shed a little blood we will see this Facade continue on and on. When we start seeing white kids shot down in the Streets then these markets will begin to reflect reality. Then you can begin to sound the Alarms Tony.
Aug 17, 2014 11:52PM

If every Nation of "original peoples" took back what had belonged to them...

Most of the people on Earth, would have to live in boats...Actually not a bad idea...

"We could teach them to fish"...Think that happened once before, if it is true...??

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