The information war out of Eastern Europe kicked up a few notches on Friday, with Moscow, Kiev and the West trading accusations and claims.
With Russia's 300-truck-long "humanitarian" convoy parked near the Ukrainian border, British journalists reportedly witnessed a convoy of Russian military vehicles -- including 23 armored personnel carriers -- cross into Ukraine. This morning, Ukraine claimed to have destroyed part of this convoy, but Russia denies sending anything over, while Europe is furiously warning that any unilateral Russian military action would violate international law.
The renewed escalation of tensions has stocks on the slide again, putting an end to the two-week long rebound the market had been enjoying. After starting strong, the Dow Jones industrial average fell nearly 100 points in the afternoon before recovering some of its earlier gains. The blue-chip index closed at 16,656, down 58 points, 0r 0.3 percent. The S&P 500 and Nasdaq composite index were largely flat on the day.
The mixed trading reflects the confusion over exactly what is happening in Ukraine, with Ukrainian border guards apparently inspecting Russia's aid convoy in preparation of the move across the border.
For Russian President Putin, the stakes couldn't be higher. Serious economic sanctions have limited the ability of the Russian financial system to borrow money in Western currencies. But "surrender" would risk undermining his power and would abandon scores of ethnic Russians in the eastern and southern regions of Ukraine -- a matter that's close to his heart according to an interview with Time magazine, which named him Person of the Year in 2007.
So, further escalation looks likely before this is all done, which comes at a time of vulnerability for the economy and markets.
For stocks, the day's headlines have pushed the major averages back below critical technical support levels. The Russell 2000 Small Cap Index moved back below its 200-day moving average, a level it has been mired below since late July. In the bond market, the yield on 10-year Treasury notes has dropped to 2.3 percent -- levels that haven't been seen since June 2013 -- as traders seek a safe haven.
And while the economic data here at home has been strengthening, with signs of tightening in the job market, it hasn't been the same story overseas. Economic releases out of Europe, China and Japan have all disappointing this week. And this slowdown has been corroborated by the weakness we've seen in economically sensitive commodities such as crude oil and copper this week. West Texas Intermediate Crude dropped to $95.50 a barrel on Thursday, a low not seen since January.
According to analysts at Stratfor, while Ukraine's forces have made progress against pro-Russian separatists, they're spread thin and vulnerable to a counterattack should Russian forces, as is feared, makes an overt push into the territory. You can see this in the chart from Stratfor shown above.
The risk for Kiev is if pro-Russian forces are able to reconsolidate themselves and force a breakthrough from the east toward Donetsk, reopening supply lines to Russia.
Another potential flashpoint comes from reports, cited by Stratfor, of the alleged separatist capture of pro-Kiev fighters planning an attack on Russia's humanitarian convoy.
Tensions are rising as Russia keeps stockpiling forces on its side of the border with more than 20,000 troops estimated along with airborne forces, battalion task groups and air defense systems. Things are likely to get a lot more strained before they get any better.