Less than two hours before the European equity market close today, news that Ukrainian troops had destroyed a “significant” part of an armed Russian convoy jolted traders out of their weekend daydreaming.
The apparently blatant incursion of armed Russian troops across the Ukrainian border has increased geopolitical tensions between the two nations heading into what promises to be an interesting weekend.
As a result of the increasing risk of a direct conflict, traders rushed to safe havens like German bunds, U.S. Treasuries, and the Japanese yen, while simultaneously fleeing from riskier assets like equities and higher-yielding currencies.
*A Bearish Engulfing candle is formed when the candle breaks above the high of the previous time period before sellers step in and push rates down to close below the low of the previous time period. It indicates that the sellers have wrested control of the market from the buyers.
With European stocks closed for the week, investors taking stock of the current picture are left with a bitter taste in their mouths. Germany’s DAX index looks particularly precarious at this point. After collapsing over 10% from its late June high, the index was only able to retrace 38.2% of the drop this week before turning sharply lower today. The shallow bounce suggests that the sellers are maintaining the upper hand for now. From a price action perspective, today’s big drop created a Bearish Engulfing Candle* on the daily chart, indicating a sharp shift from buying to selling pressure and foreshadowing a potential move lower early next week.