What Sunday’s Crimea vote means for markets

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NEW YORK (MarketWatch) — Complacency is dangerous, so it was no surprise to see some market jitters ahead of a disputed Sunday referendum that's likely to see citizens of the Crimea region vote to secede from Ukraine, setting the stage for the return of the Black Sea peninsula to Russia.

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Ukraine, the U.S. and the European Union contend the referendum is illegal. But most observers expect Russia to move quickly to reabsorb the region following the ballot. Many also see little prospect for long-lasting market turmoil barring a significant escalation of tensions or violence, with the U.S. and Western powers in position to do little beyond imposing sanctions on Moscow.

A vote in favor of rejoining Russia would likely be followed by a round of U.S.- and European-led sanctions against Moscow. But that scenario is already "baked in the cake" from a market perspective, said Ed Lalanne, strategist at Macro Risk Advisors, a New York firm that advises institutional investors.

Russian President Vladimir Putin.

U.S. stocks fell ahead of the vote, with the S&P 500 (SPX)   and the Dow (DJIA)  posting their biggest weekly declines since late January. While analysts cited jitters over Ukraine as a factor, investors are also weighing signs of a slowdown in China and gauging the Federal Reserve's effort to scale back monetary stimulus. Reports Thursday that Russia had massed troops and armored vehicles on Ukraine's eastern border didn't help the tone.

Gold and oil futures both gained ground on Friday, though oil posted a weekly decline. Talks between U.S. Secretary of State John Kerry and Russian Foreign Minister Sergey Lavrov didn't produce a breakthrough.

Equity markets in the U.S. and elsewhere are unlikely to react much to Sunday's expected result, Lalanne said. However, any sign Russia is preparing for military action with designs beyond the Crimea to other predominantly Russian-speaking portions of Ukraine or a round of heavier-than-expected Western sanctions that prompt a harsh response from Moscow would be likely to create turmoil.

Indeed, Russ Koesterich, chief investment strategist at BlackRock, noted that while events in Ukraine temporarily sent markets reeling earlier this month, stocks rebounded within 48 hours to set new highs.

"Does this suggest that events in Ukraine don't matter to markets? The short answer is no," Koesterich said, in a note. "However, investors are unlikely to respond to the events in Ukraine without a significant escalation in violence or clear evidence linking the events to the global economy, such as a disruption of oil or gas markets."

With that in mind, here's a look at how markets could react to Sunday's vote:

Energy

Let's start with oil and natural gas. Both jumped in late February and early March as tensions rose and Russian-backed forces took control of the regional parliament and swarmed Crimea. Memories of how Russia twice shut off natural-gas exports to Ukraine in the last decade were briefly revived. But Nymex WTI crude has since sunk back below $100 a barrel, while gas futures have also retreated.

Nymex April crude futures (CLJ4)  rose 69 cents, or 0.7%, to settle at $98.89 a barrel, but futures lost around 3.6% this week on a nearby-contract basis, undercut by China worries.

/quotes/zigman/2196842/realtime CLJ4 99.00, +0.80, +0.81%

"On the oil side, Crimea is a mild form of risk premium supportive to U.S. crude and slightly supportive to Brent," said Richard Hastings, macro strategist at Global Hunter Securities.

The U.S. government on Wednesday announced it would make a "test" sale of oil from the Strategic Petroleum Reserve, a move some commentators viewed as a warning to Moscow, though many industry observers dismissed the measure as a purely technical operation. See: Oil sale from SPR raises question of timing, politics.

"If commentators were right in seeing this as a signal to Russia, we would tend to say that this signal will be too weak to reach the Kremlin. It would be a different story if crude exports were to be allowed (temporarily), as this should effectively pressure the Brent/Urals complex by helping Europe to decrease its dependence on crude imports from the East," wrote analysts at JBC Energy.

If there is a market likely to do something "crazy" in the aftermath of the vote, it's crude oil, Lalanne said, emphasizing, though, that any strong reaction remains unlikely.

Gold

The yellow metal is a traditional safe haven. April gold rose $6.60, or 0.5%, on Friday to settle at $1,379 an ounce. Gold saw a 3% weekly advance, contributing to its 2014 rebound, but analysts remain reluctant to fully tie recent strength to worries over Crimea.