Russia-U.S. Tensions Surge Amid Plane Crash, New Stiff Sanctions

by Mike Larson

MARKET ROUNDUP Dow -161.39 to 16,976.81 S&P 500 -23.45 to 1,958.12 Nasdaq -62.521 to 4,363.447 10-YR Yield -.073 to 2.454% Gold +19.60 to 1,319.40 Crude Oil +2.17 to 103.37 Just when you thought the Ukraine crisis was settling down, two dramatic developments unfolded in the past 24 hours. First, and more worrisome, a Malaysian Airlines flight with 295 civilian passengers and crew on board vanished from radar over Ukraine. Early reports suggest it could have been shot down by a surface-to-air missile, and a sophisticated one at that, given the fact it was cruising at 33,000 feet. That's well beyond what a rogue rebel could have done with a simple shoulder-launched system. I'm sure we will learn much more in the hours and days ahead, and I don't want to comment too much on it now before more details are available. But considering that a separate Ukrainian cargo plane had already been downed earlier this week, and U.S. sources suggest that attack came from the Russian side of the border, this dramatically raises the stakes in the region. Second, on the political front and before the reports of the plane crash, President Obama slapped Vladimir Putin with more severe sanctions targeting multiple Russian companies, Russian officials and the Russian stock and bond markets. Subject to the sanctions are companies including the oil behemoth OAO Rosneft; No. 2 gas firm Novatek; and two major banks, Gazprombank and Vneshekonombank. The idea behind the new sanctions? Make it more difficult for them to get equity and debt financing from U.S. investors and lenders, while still allowing normal business operations to continue. Exxon Mobil (XOM, Weiss Ratings: B+) has an oil exploration pact with OAO Rosneft in the Arctic, for instance, and that joint venture won't be eliminated. Some other, odder sanctions include a provision preventing Americans from buying Kalashnikov rifles from the Russian arms giant that goes by the same name. “U.S. business groups are clearly concerned about potential economic spillover here at home.” Why the political escalation all of a sudden? The Obama administration believes Putin hasn't backed up his more conciliatory talk with concrete action to rein in the eastern Ukrainian separatists. He believes Putin is still providing covert support for the rebels, including personnel and weapons, a conclusion our European allies reportedly share. That means additional moves could emerge from Brussels later this month. Needless to say, Putin was not amused. He railed at Obama, saying sanctions "Tend to have a boomerang effect, and without a doubt, in this case they have driven Russian-American relations to a dead end, causing very serious damage." The U.S. has slapped new sanctions on Vladimir Putin's Russia, targeting companies, Russian officials and the Russian stock and bond markets. Reports of a plane crash in the region only intensified the geopolitical worries. It's worth noting the sanctions announcement comes on the heels of news that Russia is going to reopen an espionage hub in Cuba. The facility south of Havana opened in 1967, but was shuttered in 2001 to save money and improve relations with the U.S. So reopening it just underscores how things are rapidly heading south between the U.S. and Russia. U.S. business groups are clearly concerned about potential economic spillover here at home. And investors aren't exactly thrilled either. News of the sanctions helped knock stocks for a loop overnight and earlier today, and helped send crude oil prices up by around $2 a barrel at one point. The reports of the plane crash only riled markets further. The question is how much will all of this intensify market fears? Will it drive oil prices back toward $110 and beyond? Or gold to $1,400? Or the Dow back below support around 16,800? I'm more sanguine about stocks, because the underlying economic data in the U.S. continues to come in fairly strong (outside of rate-sensitive sectors like housing; more below). But I believe that gold should continue to benefit from the geopolitical tensions and war cycles my colleague Larry Edelson has discussed, and I'm clearly bullish on a wide range of energy stocks. After all, these increasing overseas tensions should only accelerate the ongoing trend toward domestic exploration, production, distribution, and refining. What about you? What do you think is behind Obama's decision? Will poking the Russian bear again help the situation by forcing Putin to back down and stop supporting the separatists? Or is it just going to make things worse? Can there be peace again in Ukraine, and if so, when?