Risk sentiment has managed to find a foothold this morning, despite little diplomatic progress being made in either the Ukraine or Gaza conflicts. Further Palestinian casualties as a result of continued bombing by the Israelis on the Gaza strip has brought the Palestinian civilian death toll close to 600, while reports this morning suggest that Hamas has captured an Israelis solider to likely use as a bargaining chip in upcoming negotiations. At the time of writing cease-fire negotiations continue to be at a standstill, with US Secretary of State Kerry placing the onus on Hamas to come to the bargaining table in an effort to halt the prolonged battle.
There is little new to report on the ongoing conflict in Eastern Ukraine, though the big news today will be the conclusion of the EU foreign ministers meeting and whether or not a new round of sanctions towards Russia will be issued. Given the sluggish economic performance of Germany in the second quarter, along with the close economic ties many European nations have with Russia, it is increasingly likely that the outcome will be the speeding up of the already agreed upon individual sanctions, keeping clear of instituting any new prohibitions. Yesterday we saw a small relief rally where equities were able to dig themselves out of an earlier hole after Obama chose not to impose any further sanctions during his speech and highlighted he preferred a diplomatic solution to the conflict, so it’s very likely that tough talk from the EU foreign ministers, though stopping short of new sanctions, would also provide markets with a boost to risk appetite as tensions between the East and West ratchet down a notch.
Equity investors are keen to put the geopolitical situations in the rearview mirror for the time being, with risk appetite getting a boost during the overnight Asian session as the Nikkei finished higher by 0.84% and erased most of its Friday’s losses after yesterday’s closure. The gains in the Nikkei helped propel modest USDJPY into the mid 101s, with firmer 10-year yields during the overnight session aiding the march higher in the big dollar. The follow-through in buying demand for the buck, particularly large volumes of USDCHF, consequently caused a breakdown in EURUSD, with the pair sliding through support at the 1.35 handle, approaching YTD lows ahead of the release of consumer prices in the US. Despite the Euro’s early morning crumble, equity indices in region are trading with a firm bid tone, optimistic the outcome of the foreign minister meeting won’t result in further Russian sanctions that could put constrictive pressure on future growth in the common-currency bloc.
Heading into the North American open, equity futures are mirroring the gains seen around the globe as optimistic sentiment takes hold. The shine from the big dollar seen during the overnight session has been dulled somewhat by a CPI reading for June that showed headline inflation increased at a 2.1% pace y/o/y as expected, though the core reading slipped to 1.9% from the 2.0% that had been chalked up in May. With consumer prices for the American economy coming in roughly in line with estimates, the Loonie has been able to stem its overnight losses, though still trading with an offer tone as USDCAD pivots around the mid-1.07 level.
On the docket for the remainder of the session is the release of Existing Home Sales in the US for the month of June, likely to garner some attention given the struggles the housing market has witnessed over the last few months. The decent rebound witnessed in May is forecasted to continue for the month of June, with the annualized reading of homes sold coming in at just shy of 5M. Both housing starts and building permits came in on the soft side of expectations last week, so if the trend of a floundering housing market continues, it could take some of the optimistic steam out of today’s equity rebound.