On Thursday, a Malaysian airliner was downed over Ukraine; Russian separatists were blamed. This was on the heels of increased sanctions imposed on Russian businesses by the U.S. and European countries. Russian stocks dropped and oil prices rose. Treasury yields also dropped, showing a flight toward safety by investors. Contributing to this flight to safety is ongoing violence between Israel and Hamas. Further pushing down Treasury yields was likely a report that new-home starts were weaker than expected, stoking expectations that the Federal Reserve may delay the inevitable rate hikes.
The geopolitical risks are difficult to navigate. This is why diversification across asset classes and countries is important. It’s also why patience is important. Geopolitical issues that push risky asset prices down tend to push them up when situations resolve or simply age. With Russia, the Russian government denied allegations that the missile that took down the airliner was from Russian troops. If that denial is true, then President Putin has an incentive to cooperate with Ukraine’s president, Poroshenko, to prove Russia didn’t have official involvement.
The situation between Israel and Hamas is heating up with ground operations. From an investing perspective, one risk is that oil supplies could get disrupted if surrounding countries enter the conflict and their oil production slows. With already high oil prices, the risk of disruption seems to be at least partially priced in.
This weekend should show developments both on the Russian and Israeli fronts. If Putin cooperates with the U.S., Europe, and Ukraine in investigating the incident, that should relieve some tensions. The path the Israel and Hamas situation will take is much more difficult to predict.