Geopolitical risk premium in global financial markets is definitely on the rise this morning as investors digest the likely impact of what amounts to an invasion of the Ukraine by Russian troops over the weekend with an estimated 6,000 of them now stationed in Crimea in response to the overthrow of the Russian-backed president by an angry mob in Kiev.
Russian Prime Minister Dmitriy Medvedev said: ‘Ukraine for us is not a group of people who, pouring blood on the Maidan (Kiev’s main square), seized power in violation of the constitution and other state laws. Russia needs a strong and stable Ukraine. A predictable and economically thriving partner. Not a poor relation that’s always standing with a hand held out.’
Pull this sort of trigger in global financial markets that are already very overstretched in valuation and you have a potential black swan event that could unleash a far wider systemic contagion.
The S&P 500 index only put in a new all-time high last week. Japan looks vulnerable to a flight to the safety of the yen. Chinese credit markets are showing signs of strain alarmingly reminiscent of US markets before the 2007-8 subprime crisis (click here). The eurozone crisis was never really settled and its banks remain vulnerable. Debt defaults could be widespread undermining the banking system (click here).
This is the sort of shaky global financial edifice that could be very easily kicked over by a major crisis in the Ukraine. Investors today will start to price in that possibility. There will be a flight to the safety of the US dollar, yen and gold and silver, and away from riskier assets like emerging market stocks and major stock markets too.