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Mid-week market recap: Markets rattled by Russian sanctions

Markets rattled by Russian sanctions
Markets rattled by Russian sanctions

For the mid-week ending August 8, 2014, the markets have become more volatile recently due to several issues: First, the effects of the Russian sanctions on European markets (the situation in Ukraine is worsening as Russian President Putin threatens to send troops over the border to help the rebels). Second, positive economic news and earnings are causing traders to be concerned about a Fed rate hike occurring earlier than mid-2015. And third, Germany's dependence on Russian natural gas.

U.S. and European economic sanctions against Russia are impacting the bourses (European markets) due to expected damage to Europe's economy. The extent of the damage is still unknown, especially when Russian President Vladimir Putin plans retaliatory sanctions. The euro zone economy remains fragile as Germany's second quarter factory orders posted far weaker than expected and Italy has fallen back into recession.

The rally in the dollar underlies concerns that a Fed rate hike will occur earlier than mid-2015. Relative to Europe, the U.S. economy is robust: over 200,000 new jobs have been added for a sixth straight month; and GDP last quarter grew at 4 percent.

The leading economy in Europe, Germany is most vulnerable to Russian retaliatory energy sanctions. This is due to its strong avoidance of alternative energy sources; specifically nuclear energy. The German government has implemented a new law aimed at reducing the skyrocketing costs of energy by slowing the rate of growth of renewable energy through subsidy reductions. In the interim, the government faces lawsuits from nuclear companies over an excessive nuclear tax introduced in 2010.

With continued increased tensions in Ukraine and further sanctions against Russia, we expect volatility to increase. If Russia sends troops into Ukraine and retaliates with energy sanctions, the impact on the bourses will impact U.S. markets; we could see a sizable adjustment that has been anticipated for some time.

For option traders, place Put credit spreads at 2 standard deviations. The expected price of the SPX at the close on Friday will fall within 1875-1966 (or 2 standard deviations).

For more information about options, see the 'Suggested by the author' links below.

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