The Wall Street Journal has one of their ‘5 things’ posts up … this time its ‘5 reasons for investors to care about Russia’s market turmoil’ …
- “the reality is that a plummeting ruble and the disarray in that country’s markets pose real threats to the global economy”
It’s a nice piece, and in brief …
The first two of the five address the issue of market contagion:
1. Bond market contagion:
- Russia’s biggest corporations continued to borrow heavily in dollars & are now at risk of defaulting on those bonds
- Holders of those bonds will face losses and will dump other risky bonds to cover those losses
- This widens the market fallout
- Those in line for contagion include the sovereign bonds of EM countries and junk bonds in the U.S.
2. Currency market contagion:
- Currencies of Russia’s trading partners are falling in “sympathy.”
- That’s all very well if it’s contained
- But if it goes too far, too fast, it can foment the same reinforcing spiral
- A few currencies in particular are in line to become the next domino … Turkey’s lira, Indonesia’s rupiah
And, apart from the contagion issues:
3. Further declines in oil prices:
- A chaotic decline of more than 45% in less than six months is now showing its negative side – in part via the financial stress felt by oil producers, which will struggle to meet debt payments, and in part because investors in commodities and high-yield bonds are hurting and selling other junk debt and other commodities in response
- Russia’s economic woes could make the imbalance in crude markets even more extreme
4. An escalating military conflict?
- Like a wounded bear, a weakened Russia could be more dangerous than a strong one
- President Vladimir Putin got a powerful message from poll numbers that put his approval rating as high as 80% in response to Russia’s incursions in Ukraine … he might opt for a similarly belligerent response as he seeks to extract concessions from the West and bring relief to the Russian economy
5. A cold winter for Europe?
- Russia might follow through on threats to curtail natural gas supplies to Europe
- Germany, for example, gets more than a third of its gas supplies from Russia
- Poland & other Eastern European countries … the dependence is almost total
- Gas in those countries is used to heat homes and keep critical industries running. A blow of this kind would be economically devastating to a giant economic region that’s already suffering from stagnation and deflationary pressures. As with the euro crisis of two years ago, an event like that would quick spill over into U.S. and other markets.
More detail at the article (ungated).
Have a nice day
