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Equity markets were under pressure throughout yesterday’s session, initially weaker as fighting escalated in Kiev and the Ukrainian army was authorized to use weapons on civilians, and then dove lower after the minutes from the last FOMC meeting dashed market participants hopes that the recent weakening of US economic data might prompt the Fed to alter its taper trajectory.   Not surprisingly, the minutes showed that the FOMC members favoured continuing to reduce the pace of purchases by a total of $10bn at each FOMC meeting, unless the economy deviated substantially from its expected path.   In regards to forward guidance, the committee noted that with the unemployment rate approaching its 6.5% threshold, forward guidance would have to be altered soon, although there wasn’t a clear message as to whether the change would be of a quantitative or qualitative nature.

Some members expressed their view to alter the current quantitative forward guidance, while others felt it would be necessary that risks to financial stability should “appear more explicitly in the list of factors that would guide decisions about the federal funds rate once the unemployment threshold is crossed.”   Therefore, the big takeaways from the minutes was that the taper trajectory is unlikely to change unless there is a material transformation in the economic outlook, forward guidance will likely be adjusted shortly (yet the form of the alteration is not clear at this point), and spill over to the US from the emerging market turmoil is likely to be modest.   After the release of the minutes, the DXY caught a bid and finished the day up by 0.27%, the S&P completed its dump into the close to shed 0.65%, and Gold had $10/ounce lopped off from its open, finishing the North American session just above $1,310/ounce.

The overnight session started out with a slightly positive tone, taking solace in the fact that the President of Ukraine had authorized a temporary truce with the opposition, and would initiate negotiation talks aimed at ceasing the bloodshed and stabilizing the precarious political situation.   It didn’t take long for the truce to be shattered, with gunfire erupting overnight and reports from Kiev that military snipers were firing live rounds at the protestors.   The price action of Ukrainian Hryvnia against the USD has gone parabolic since January, with the currency weakening a further 0.68% today to trade up to 8.90.

With the geo-political situation escalating in Ukraine, global equities also got a nasty shock from a bout of Manufacturing PMIs released overnight which missed expectations, increasing concerns the beginning of 2014 might be rocky in regions like China and the EU.   The Chinese HSBC Flash Manufacturing PMI for February fell to a 7 months low at 48.3, a faster decline than was registered in January, with its employment sub-index the lowest since February of 2009.   The report highlighted the underlying momentum in the manufacturing sector was weakening due to renewed destocking activities, and thus could prompt policymakers in China to fine tune policy in order to smooth out the worrisome decline in activity.   The Shanghai Comp ended lower by 0.18%, while risk-off sentiment from the disappointing PMI number and fighting in Kiev drove USDJPY back towards the 102 handle.

China was not alone for experiencing weaker activity in its manufacturing sector for Feb, as both French and German purchasing managers reported lower activity in their respective regions, dragging the overall manufacturing PMI for the zone to 53.0 from last month’s 54.0.   The pessimistic investor sentiment is permeating through Europe heading into the North American cross, with the FTSE, Dax, and Stoxx down by 0.32%, 1.24%, and 0.85% respectively.   The EUR is lower against the buck before US CPI data this morning, but managing to find supportive bids in the 1.3700 region.   Next week will be a big one for the EUR in terms of economic data, and could establish whether the high-1.37s against the dollar was in fact a near-term top, or if the pull-back in effect is just a slight breather before the pair marches higher.   CPI data for the zone  on Monday  and then money supply growth  on Thursday  will be important data points for Mario Draghi and the ECB, and if we see a further slip for both readings, it will most likely prompt the ECB to take some action at their next policy meeting in March.    

Heading into the North American open, inflation data for the United States in January just hit the wires, showing that both core and headline printed bang-on expectations with an increase of 1.6% on a y/o/y basis.   This is a slight moderation for the core reading and the same magnitude increase for the headline print when compared to December, not really shaking markets in terms of an unexpected event.   With both readings below the Fed’s target of 2% it gives the FOMC further leeway after QE has been wound-down to keep rates at accommodative levels for an extended period of time, helping support the recovery as long as inflation is kept in check.   S&P equity futures are still slightly negative ahead of the opening bell, while the Loonie continues to fall out of favour, with USDCAD within striking distance of the 1.1100 handle.

Looking ahead to  tomorrow, the end of the week is capped off with a CAD-centric day of economic data, as both CPI and Retail Sales numbers are set to be released.   The Canadian consumer had been doing some fairly heavy lifting into the end of 2013, providing solid numbers in terms of retail demand; however, this is expected to moderate in December, with expectations the headline reading falls by 0.4% when compared to November.   With the weakness in the wholesale trade numbers we saw yesterday, there is little to suggest an upside surprise is in the cards for  tomorrow, which doesn’t bode well for the beleaguered Loonie.   On the inflation side of things, there also hasn’t been much activity from other leading indicators that suggest excess slack in the economy is being sopped up and pricing pressures are set to take off, so we would similarly expect another soft CPI print that comes in well below the Bank of Canada’s 2% target.   The price action in USDCAD from yesterday doesn’t bear well for the Loonie bulls, as the spike in USDCAD erased half of the losses accumulated over the last month, with the Stochs completing a bullish cross and spot moving back through the short-term moving averages.   Should the Canadian data disappoint compared to what market participants are expecting, it is highly likely the consolidation in USDCAD may have come to an end, and the pair looks to test the highs from January of this year.

Further reading:

USD/JPY bulls may soon take the initiative – technical analysis

No surprises from US inflation figures