This Is What An International Incident Does To Markets

The shooting down of a Russian fighter-bomber by a Turkish F-16 sent powerful ripples through the world from the diplomatic and military side to the financial side. Although one never knows, let’s hope that cooler heads will prevail and we will return to the previous status quo.

Let’s talk about energy. Fundamentals have not changed in the least. If anything, market realities have grown more negative toward crude prices, in particular. There is still a glut – a veritable sea of oil. Moreover, demand is declining via a slowdown in manufacturing in China and worldwide and less consumption of gasoline.

Then there is the sun, wind and flowing water. Oil simply has bigger, better-financed and better-positioned rivals in the alternative energy arena than it did just ten years ago.

And, as we’ve said often, too, other oil producing nations – especially in North America –can and will ramp up their production once prices float upward, which will batter them back down.

Keep in mind that none of the countries directly affected by the downing of the Russian plane are Middle East oil producers. Yes, Russia is a big producer of energy, but the theater of concern is miles away from Russia’s energy regions.

Finally, for oil, we have to navigate an OPEC meeting at the end of next week. Speculation runs all over the place as to what we may expect. Our thought is that the Saudis will perhaps relent on the price by agreeing to a decrease in output. However, we believe this will be in the way of lip service and no meaningful change will come in medium-to-long-term pricing.

The shoot down gave gold a much needed price boost (as it did silver), but platinum and palladium didn’t feel the love and fell again. It should be noted that as the day wears on and things remain quiet diplomatically that gold is well off its early high of approximately $1082. 

The stronger euro, a counterintuitive move, is due to the cost of euro borrowing, which rose. That naturally pushes the dollar down, which by extension pushes the price of gold up.

U.S. stock indexes are struggling to remain in the green zone as late afternoon comes upon trading. The S&P 500 main index had forayed into the 2090+ range, but has since fallen back. At nearly 4 o’clock in New York it appears to be headed toward closing about even.

The Dow is operating in the same manner while the NASDAQ has its toe in the red.

Europe’s stocks stumbled on the Turkish-Russian air battle, which is understandable since euro-bourses have so much exposure to both countries on the buying and selling ends.

Russia has been blundering about in the Mid-East for two months, positioning itself perilously close to other actors among which Turkey is but one. Sometimes, American fighters and Russian attack planes like the one just shot down are less than seven minutes apart. Those things fly pretty darned fast, remember.

It’s also worth remembering that the current map of the Middle East was drawn after WWI and reflected French and British interests in the region. The geography they were slicing and dicing before the war was almost exclusively the turf of the decayed Ottoman Empire.

It’s also notable that the Turks and the Russians fought on opposite sides in the Crimean War between 1853 and 1856.

Russia needs access to the Mediterranean Sea for its ships, military and commercial. That route goes right through Turkey and past its capital, Istanbul.

The point is that Turkey and Russia have lots of enmity, and Turkey holds a big sword that they can, at any point, put to the neck of the Russian bear.

Wishing you as always, good trading,