Markets shrug off politics

Despite the recent escalation of the Ukraine crisis following the downing of flight MH17, markets have bounced back.

The crisis in Ukraine escalated sharply last week after Malaysia Airlines flight MH17 was shot down with Russian separatists the key suspects. Yet after a brief dip last Thursday when the news broke, markets have bounced back. Early this week, the S&P 500 index in the US hit a new record high close to 2,000.

What the commentators said

Investors seem to be ignoring geopolitics even though the situations in both Iraq and Ukraine are potentially dangerous if they get worse. Each could cause a spike in oil prices, "a real headwind for the global economy at a time when... growth is so fragile".

Ultra-loose central-bank policies have acted as "a giant anaesthetic" for investors, said JP Morgan Asset Management's Andrew Goldberg. Investors have been conditioned to buy on the dips' in the belief that central banks will always come to the rescue with more money printing. Without this support, investors would be far more rattled by all the uncertainty.

And Russia may be less resilient to this crisis than many investors appear to believe. Even if the European Union doesn't impose harsh new sanctions, the outlook for the economy is clouding over, said Hamish McRae in The Independent.

Growth was barely positive before the invasion of the Crimea. Now the rising perception of the risk of investing in Russia, and the mere threat of further restrictions, are making it pricier for Russia to borrow from international markets.

The yield on the ten-year government bond is now 9%, up from 7.7%. Capital is flowing out of the country. Longer term, this "one-trick pony economy" massively dependent on energy exports will need Western know-how to diversify its economy.For now, at least, its odds of receiving this are dwindling.

Investors should also beware of the impact on European stocks. Geopolitical jitters already seem to be taking their toll on Europe' weak recovery. German investor confidence, for instance, has slid for seven months in a row. If this drags on, said Wolfgang Munchau in the FT, it could become the shock that sends Europe into deflation.

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