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Ukraine's chaos: Why it's having such a big effect on emerging market economies like ours

by , 28 February 2014

Unrest in Thailand, Venezuela and Ukraine, as well as precarious governments in Turkey and Argentina have all conspired to give emerging markets a black eye over the last few months. This week the Ukrainian situation took the spotlight as protestors struggled to form some sort of government after the ouster of the former Prime Minister.

Here's what's going on and how it's affecting our stock market.

There are a number of reasons why emerging markets like the Ukraine are so volatile right now

Complicating the situation is the involvement of outside forces, each trying to turn emerging market instability to their own advantage.

On one side, is the European Union. It would like closer ties to the Ukraine but are unwilling to provide the money required to help the country.

 And, on the other side, there’s Russia. It doesn’t want closer ties with the West and was willing to provide the previous administration about $15 billion to achieve this.

Without these funds, Ukriane may have to default on its $70 billion debt. This would have sent shockwaves throughout the financial world and negatively affecting sentiment towards emerging market bonds including our own.

If this wasn’t enough, the Ukraine is also the main pathway for Russian energy exports to Western Europe and has a large Russian speaking population along with Russian military bases in some regions.

This raises the spectre of Russian military intervention. The like of which we saw in the past in Georgia.

The Ukraine, however, is a much bigger country than Georgia. Hopefully cool heads will prevail as no-one can predict the outcome or repercussions if there was a confrontation.

That said, if we see a real flare up, expect some commodity prices to rise since Russia is a large exporter of resources. (In this case, I’d focus on Platinum and Oil as these are the easiest to trade and Russia is a massive source country for both.)

What economic data can we expect from the global economy this week?

This week includes the first Friday of a new month. And by now, you should know that this means just one thing: US Non Farm Payrolls and Unemployment Rate.

These numbers are extremely important as they’re the only figures likely to shift the US Fed’s Tapering timetable. Expectations are for 150,000 new jobs and an unchanged unemployment rate. A possible complicating factor is the spate of bad weather that the US experienced over the last few months. This could be used as a mitigation for a wait-and-see approach should we get a large surprise in these figures.

Closer to home, there’s a spout of economic data on the cards

In local news, we’ll have a couple interesting releases next week.

At the start of the week, we’ll get Manufacturing PMI, Vehicle Sales and Business Confidence. Last week, Imperial complained about a downturn in the vehicle market, noting that their margins were under pressure. Given the higher interest rate and weak economy, there’s little hope of this changing soon.

Later in the week, Gross and Net Reserves will come out too. This may impact the rand, but I believe current rand weakness has more to do with external factors relating to things like the emerging market chaos above than internal weakness.

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Ukraine's chaos: Why it's having such a big effect on emerging market economies like ours
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