/perspectives/global-cio-outlook/old-embers-never-die

Old Embers Never Die

The situation in Ukraine could become worse than markets now anticipate as Putin’s best interests might not be what investors expect.

April 29, 2014    |    By Scott Minerd

Global CIO Commentary by Scott Minerd

So far, financial markets have failed to recognize the potential long-term seriousness of the situation in Ukraine. I suspect this may be because very few investors remember the Cold War period, and therefore, may not always place current events into a historical context. Many feel that having annexed Crimea, President Putin is satisfied with his lot and will not invade Ukraine. If history is our guide, this may be only the beginning of this crisis. It is worth remembering the initial feeling of relief in the United Kingdom after the signing of the Munich Agreement in the fall of 1938.

The belief that the situation will not get much worse is predicated on the notion that all political players ultimately act in the best economic interests of their country. The argument goes that in light of the inevitable sanctions and international isolation that would follow, Putin would not dare advance into eastern Ukraine. However, considering the strategic importance of controlling Ukraine, it can be argued that Putin is in fact acting in the long-term best interests of Russia and would be willing to suffer some short-term pain.

So what does this mean for markets? In the short-term, any “risk-off” trade in Europe will likely be positive for U.S. assets, particularly bonds. I expect to see more capital flow into the United States as a result of this ongoing conflict. Events could also slow the ongoing European economic recovery, stemming perhaps from the potential disruption to gas supplies, although it is unlikely to derail the expansion on the continent. Longer term, heightened aggression from Russia could reduce the pressure to cut the U.S. defense budget.

Heightened Tensions over Ukraine Would Hurt but Not Derail Europe

As the conflict in Ukraine drags on, the probability of more severe sanctions on Russia is increasing. Such sanctions could send Russia into a recession, but the impact would also be felt in Europe. In addition to potential disruptions to natural gas flows, it is likely that European exports and financial activity in Russia could fall, whether due to sanctions or to decreased Russian demand. Though not a substantial portion of European economies in aggregate, Russian exposure is meaningful in countries, such as Austria and the Netherlands. Germany’s trade linkages are also heavier than many other European countries, which may explain its reluctance to apply tighter sanctions.

EUROPE’S TRADE AND BANKING EXPOSURE TO RUSSIA

EUROPE’S TRADE AND BANKING EXPOSURE TO RUSSIA

Source: Haver, BIS, IMF, Guggenheim Investments. Trade data as of 12/31/2013, bank data as of 9/30/2013. Note: AT=Austria, BE=Belgium, CH=Switzerland, DE=Germany, ES=Spain, FR=France, GR=Greece, IT=Italy, NL=Netherlands, PT=Portugal, SE=Sweden, UK=United Kingdom.

Economic Data Releases

U.S. GDP Frozen in First Quarter

  • First-quarter U.S. GDP barely budged, rising just 0.1 percent at an annualized rate. Personal consumption, driven by healthcare spending, rose a solid 3.0 percent. Weak investment spending, falling inventories, and weak trade pulled down growth.
  • Durable goods orders were better than expected in March, up 2.6 percent and 2.0 percent, excluding transportation, a 14-month high. Computers and electronics orders were especially strong.
  • University of Michigan Consumer Confidence was better than expected in the second April estimate, jumping to the highest level since last July.
  • The S&P/Case-Shiller 20-City Home Price Index showed slower growth in February, continuing a three-month slide. Prices rose 12.9 percent from a year earlier, less than expected.
  • Pending home sales rebounded 3.4 percent in March, the first increase in nine months.
  • Initial jobless claims bounced back up to 329,000 for the week ended April 18, which may reflect seasonal adjustment factors due to the Easter holiday.
  • The Conference Board’s Consumer Confidence Index declined in April to 82.3 from 83.9. Expectations rose while the present situation index was down.

Economic Confidence in Euro Zone Dips

  • Economic confidence in the euro zone fell for the first time in a year in April, decreasing from 102.5 to 102.
  • The euro zone-wide CPI rose to 0.7 percent year-over-year in April after March’s multi-year low of 0.5 percent.
  • Germany’s IFO Business Climate Index reversed last month’s decline in April, rebounding to 111.2 as expectations improved.
  • Germany’s harmonized CPI increased to 1.1 percent year-over-year in April, the first acceleration since last November.
  • Italian consumer confidence jumped to more than a four-year high in April of 105.4, up from 101.2.
  • U.K. retail sales unexpectedly rose for a second consecutive month in March, inching up 0.1 percent. Excluding volatile auto sales, the figure fell 0.4 percent.
  • U.K. GDP grew 0.8 percent in the first quarter according to the preliminary estimate, slightly below expectations.
  • Japan’s consumer price index continued to tick up in March, reaching 1.6 percent from a year earlier. Prices excluding fresh food, the government’s preferred inflation measure, were flat at 1.3 percent.
  • Japanese retail sales surged a record 6.3 percent in March, as consumption was pushed forward ahead of the sales tax increase.
 

FEATURED PERSPECTIVES

June 01, 2023

Fixed Income Is Now a Buyer’s Market

Improved value proposition in credit.

May 16, 2023

Second Quarter 2023 Fixed-Income Sector Views

Opportunity in fixed income rises with uncertainty.

April 18, 2023

The Pre-Recession Playbook for Up in Quality

An opportunity for active management.


VIDEOS AND PODCASTS

2022’s Upside: The Fed Has Put the Income Back in Fixed Income 

2022’s Upside: The Fed Has Put the Income Back in Fixed Income

Anne Walsh, Chief Investment Officer for Fixed Income at Guggenheim Investments, joined Asset TV to discuss macroeconomic conditions, risk, and relative value in the bond market.

Macro Markets Podcast 

Macro Markets Podcast Episode 26: Mortgage-Backed Securities, Structured Credit, Market Liquidity

Karthik Narayanan, Head of Securitized for Guggenheim Investments, discusses value in the residential mortgage-backed securities market and other ABS sectors. Anne Walsh, Chief Investment Officer for Fixed Income, answers a listener question on liquidity. Jerry Cai, an economist in our Macroeconomic and Investment Research Group, brings the latest on the labor picture and an update on China.







Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.

Investing involves risk, including the possible loss of principal.

Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Advisors, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC.

© Guggenheim Investments. All rights reserved.

Research our firm with FINRA Broker Check.

• Not FDIC Insured • No Bank Guarantee • May Lose Value

This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation. Investing involves risk, including the possible loss of principal.