How Global Stocks React to Conflict in Ukraine

U.S. stocks outperformed both European and emerging-market stocks in 2013. And two months into 2014, that trend seems set to continue.

That means equity investors still have the opportunity to profit from the growing divergence between relatively stable state-side stock markets and rapidly deteriorating markets in the developing world.

Russia’s amped-up provocations in the Ukraine meant stock markets around the world opened lower this morning. Still, U.S. markets are taking the blow in stride (relatively), while European and emerging-market stocks are taking a bigger hit.

Global markets’ reactions to tensions in Ukraine roughly follow the relative strength trend we’ve seen since the start of the year. That is, the U.S. has shown greater strength than Europe, which has shown greater strength than emerging markets, which have shown greater strength than China. The exception is Europe’s particularly weak performance since Friday.

As of Friday, European stocks were outpacing the S&P 500, with VGK gaining 2.4% versus SPY’s gain of 0.8%. But shortly after the open today, both fell back to their 2014 zero line.

As of 10 a.m. this morning, losses from Friday’s close are tallied as:

  • S&P 500 (SPY): -0.62%
  • China (FXI): -1.2%
  • Emerging markets (EEM): -1.6%
  • Europe (VGK): -1.9%

I tend to think any negative effects the Ukraine conflict will have on U.S. stocks will be short-lived. But we shall see…

It’s undeniable that emerging-market weakness and an insanely bubbly Chinese property market could quickly ripple into the U.S. economy. And the Russia/Ukraine flare-up could put a lid on the recovery in European equities that began last summer.

Here’s a chart showing year-to-date returns of the S&P 500 (white), Europe (green), China (red), emerging markets (blue), along with nine U.S. stock sectors — with health care (red) and utilities (orange) leading U.S. stocks higher.

See larger image

We’ll need to see some resolution of the Russia/Ukraine situation before “normal” global market trends get back on course. Until then, risk-off sentiment will cause short-term moves that may quickly reverse once the conflict settles down.

Stay tuned… this will be an interesting week, for sure.


*Correction*
In my article on Friday I wrote that we saw a drop of 0.8 yuan between late January and late February, which resulted in a loss of about $4 billion. That 0.8 should have been 0.08, making the loss $400 million. — Adam

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Categories: Foreign Markets

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.