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The Charge of the Light Brigade hasn’t begun quite yet, but the prospect of another war in the Crimean peninsula looms over the financial markets this morning. Safe havens like the dollar and the yen are seeing strong inflows, while equity bourses look likely to take a beating after the opening bell.  

Oil prices and European natural gas prices are trading with a strong bid, driven by concern that supply disruptions  could impact the broader market.  

Thus far, the damage has been most evident in Russia itself. The main stock index is down more than 8%, with investors fearing the imposition of sanctions. The ruble is crashing, forcing the central bank to sell currency reserves against the ruble, helping to wind down the $500 billion war chest that the petro-power once possessed.  

From our perspective, it seems most probable that the crisis will have a small long-term effect on market outcomes. Russia has long held a controlling interest in the Crimean peninsula, and although Kiev is unlikely to agree to the region’s secession, a hot war would be immensely damaging to all concerned.  

For market participants, this would suggest that elevated volatility levels should be seen as an opportunity to enter trades. Larger movements should generate attractive execution opportunities on both sides of the market through the coming week, and structured option products should offer increasingly efficient pricing.  

Warren Buffett’s advice comes to mind – “be fearful when others are greedy, greedy when they are fearful”.

Trends With Benefits:

The Canadian dollar is trading on a slightly stronger footing this morning, after economic growth unexpectedly accelerated during the fourth quarter of last year. According to a report released by Statistics Canada  on Friday, gross domestic product grew by 2.9% on an annualized basis between October and the end of December.  

This crushed any ideas about rate cuts that still existed in the markets, but wasn’t positive enough to bring rate hike expectations forward. – leaving investors to view this week’s Bank of Canada meeting with a considerable degree of apathy.

Consumers continue to drive growth, with household spending expanding by 3.1%, partly supported by borrowing costs that remain near multi-decade lows. Unfortunately, this wasn’t mirrored on the enterprise side of the economy, where Bank of Canada Governor Poloz has expressed so much concern. Business investment actually fell by 1.9% through the fourth quarter, while the current account deficit barely budged. This has left investors to view  Wednesday’s  rate decision with considerable apathy – few expect the central bank to step on the stimulus pedal (or apply the brakes).  

As such, rate decisions from the other major banks are likely to drive trading activity over the coming days, to be followed by the mother of all data releases  on Friday, when the US non-farm payrolls report is due to drop.  

The Reserve Bank of Australia meets first, and although rate movement expectations are relatively muted, the accompanying statement could contain a few surprises. In the event that policymakers decide to jawbone the currency farther down, we could see a drop into the 88 cent range once more.  

The Bank of England is next at bat, but is widely expected to be a non-event. The institution does not release a statement when rates do not move, meaning that GBP traders are likely to keep calm and carry on.  

In contrast, the European Central Bank’s announcement is prompting widespread speculation. Many observers foresee a modest cut in repo rates, aimed at bolstering money supply growth in the euro area. One would normally expect this to weigh on the exchange rate, but the market has gone heavily short ahead of the event – meaning that it is quite likely that the currency rallies regardless of the statement’s substance. As a matter of fact, we suspect the euro area has more to fear from the situation to the East, than from monetary loosening for the time being.  

Friday’s  employment report will unquestionably move markets. Consensus estimates have coalesced around the 150k mark, pulled lower by a string of underwhelming data releases over the last month. Many pundits are blaming the weather, but a sense of unease is percolating through investor minds, with some beginning to worry that the weakness is more fundamental. In the event that the number disappoints, the selloff could be severe – but on the other hand, a positive surprise could have an outsized impact.  

Further reading:

Markets eagerly anticipate decisions from the ECB and BoE this week

GBP/USD upside bias remains intact and trend resumption is imminent