The situation in Ukraine is becoming more and more serious, and Russian forces could advance west into Ukraine proper. While this could cause a slowdown in the ongoing European economic recovery, stemming from the subsequent disruption of gas supplies, I do not believe it will be enough to derail the expansion taking place on the continent.
What does all this mean for the U.S. investor? Any kind of "risk-off" trade in Europe should be positive for U.S. assets, in particular bonds. I expect to see more capital flowing into the United States as a safe haven trade. As for U.S. equities, the New York Stock Exchange Advance Decline line reached a new high last week, meaning any sell-off will likely be muted. I maintain my view that we will be at new highs before the end of this year. This topic was discussed heavily at the Milken Institute Global Conference.
Turmoil in Ukraine Causing Flight to Safety
It appears that amid continued geopolitical uncertainty, a flight to safety is occurring in global financial markets. We use Russian government bond yields to measure the degree of uncertainty regarding Ukraine, and the average correlation between traditional safe haven assets to measure flight to safety. These indicators show that over the last several months, the situation in Ukraine has caused investors to increasingly seek out safer assets, and due to the likelihood of continued, or increased, instability in Ukraine, safe assets such as U.S. Treasuries stand to benefit.
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