Putin and the Fed Keep Giving Us Buying Opportunities
August 15, 2014
In my opinion, there is little Vladimir Putin can do to retaliate against Ukraine for partially destroying the Russian military convoy that crossed into Ukraine last night. However, Ukraine has not blown up Russia’s slow-moving humanitarian convoy—as many had previously feared. So Putin seems to be back in the no-win situation of simultaneously expressing his commitment to finding a diplomatic solution to the Ukraine situation, while being caught sending military equipment into Ukraine, presumably for the separatist rebels. Because Europe still doesn't have the political or economic will to bring additional broad sanctions against Russia, we believe matters are likely to wind up where they have been, with verbal sparring but no real escalation in tensions.
Meanwhile, 10-year Treasury yields continue to fall (to 2.33% as of today). European investors are still chasing U.S. yields downward as European economies, including Germany, contracted in the second quarter and Ukraine sanctions exacerbate business and consumer uncertainty. Given that Japan, South America, and Russia have also recently shown economic contraction and that U.S. housing and retail are still both weak, it's hard to see the Fed raising short-term interest rates any sooner than it has to in 2015. And the debate at next week’s annual Jackson Hole Economic Policy Symposium will likely shift from when the Fed will raise rates to how Europe can get out of its economic malaise.
In sum, we view today's geopolitical volatility as another buying opportunity in what still seems to be the middle innings of a secular bull market.