Financial market participants welcomed assets correlated to positive risk appetite with open arms yesterday, embracing the de-escalation of geopolitical tensions as Russia clarified some of its recent actions and recalled the mobilization of troops along western Russia. A test-fire of a Russian missile into Kazakhstan near the end of the North American trading session failed to put a damper on the positive sentiment in equities, with the S&P gaining back all of yesterday’s losses and then some, finishing the day up by 1.53% at record highs.
The Japanese Yen felt the ill-effects of the increase in market risk appetite, with USDJPY strengthening 0.8% to vault over the 102 handle, the largest one-day percentage change since January 14th. While the ramifications from the events of the past few weeks are likely to drag on as the US and Russia go back and forth threatening various repercussions against each other should the other side step out of line, we’re likely to see the larger event risks of a re-ignition of tensions fade as both countries decide to take a diplomatic approach. The allies of the United States (Europe and the UK) are dropping into the shadows, preferring to work with Russia as opposed to imposing sanctions, while the Russian’s threat of dumping US treasuries and abandoning the dollar as a reserve currency are essentially empty threats. As Mr. Schamotta noted in this piece at the beginning of the week, while there is likely to be continued volatility in financial markets surrounding the Eastern European conflict, we’re likely to see little long-term consequences on the global landscape based on how things are currently unfolding.
The overnight session was muted in terms of news flow surrounding the situation in eastern Europe, with little in the way of new developments other than Europe offering a€1.6bn loan to Ukraine as part of a European aid package, however this is conditional on Ukraine striking a deal with the IMF, and total aid to the country could be in the neighbourhood of $15-16bn.
Australian GDP for the fourth quarter was released overnight, signalling momentum into the end of 2013 was stronger than forecast as growth picked up to 2.8% on an annualized basis. The good news for the Australian economy was that residential construction strengthened over the fourth quarter, an area policy makers have been hoping to support in an effort to try and offset lower levels of mining construction. The transition of the Australian economy rebalancing away from relying so heavily on mining and commodity production will be key to the health of the region moving forward, with today’s data showing some early signals things are moving in the right direction. The Aussie gained against the USD after the growth figures were released, moving into the high-0.89s midway through the European session.
Turning our attention to Europe, equity indices are looking at some marginal give-back from yesterday’s strong gains, with the major bourses lower as we get ready for the North American open. PMI survey’s on the service sector and retail sales for the Eurozone all came in better than expected overnight, reducing the pressure on the European Central Bank to act at tomorrow’s meeting. The service PMI for the common-currency bloc printed at 52.6, the highest level since June 2011, beating estimates of 51.7, which was also the previous print in January. Similarly, retail sales for January increased by 1.6% and erased the 1.3% loss sustained in December, helping boost confidence that the consumer began 2014 with an optimistic outlook for future economic prospects. The EUR is slightly weaker against the USD ahead of the opening bell in North America, dipping into the low 1.37s, signalling that traders and investors haven’t materially changed their views that we could see a small repo rate cut from the ECB at tomorrow’s meeting.
On the North American data front, the ADP employment report for the US in the month of February was just released, and showed the American economy added 139k private jobs last month, much lower than the 160k analysts had expected. In addition to the softer than forecast labour market picture for February, the previous month’s number was revised from 175k to 127k, a sharp downward revision to bring the ADP report closer to what the Bureau of Labour Statistics reported in January. The service industry in the US added the bulk of the jobs for the month in February, with professional services accounting for nearly a quarter of all new employment in the private sector.
The rationale for the softer payroll print according to data provider ADP and Moody’s was that bad winter weather weighed on employment, and that hiring should pick up with warmer temperatures. While today’s number doesn’t bode well for the larger impact NFP from the BLS on Friday, the last three months have seen a bit of a divergence between ADP and NFP, so we haven’t yet seen too much negative response in the markets. S&P futures are hovering on the green side of unchanged, while the DXY holds its early morning gains to keep itself above the 80 handle.
The Loonie is slightly stronger ahead of the Bank of Canada rate decision this morning, little changed after the ADP employment report. With a soft US jobs not influencing the Loonie much thus far, it appears as if traders are positioning for some hawkish undertones with the BoC’s statement this morning, thinking the bank may switch up their statement about the downside risks to inflation growing in importance. The Loonie is pivoting in the high-1.10s against the American dollar, with an unchanged policy statement from Governor Poloz likely to see some selling pressure for the CAD as traders trim some of their recently established long positions.
As we look ahead to tomorrow, the event calendar is chalk full of central bank meetings, with a little bit of domestic Canadian data sprinkled into the mix. The most widely anticipated central bank meeting this week is the European Central Bank, as they are the ones most likely to change up their currency policy mix in an effort to stem the tide of disinflation in the common-currency bloc. Given the ECB’s reluctance to pursue more accommodative monetary policy actions over the last few months, the fact that the PMIs remain fairly positive in the region, and inflation remained unchanged at 0.8% in February, we don’t foresee the ECB altering policy at tomorrow’s meeting. A small cut in repo rate could potentially materialize, but this would most likely be more symbolic than substantive, as it doesn’t get to the crux of the issue which is still private lending.
And while there has been talk about an end to the sterilization of the SMP program, it seems as if there are still too many issues with the EU’s treaty for actually formalizing stopping the sterilization of bond purchases, which doesn’t make it a viable option for the meeting tomorrow. Given these market developments, we see the risk biased to the upside for the EUR, suggesting corporations with un-hedged short EUR positions could be vulnerable going into tomorrow’s meeting; especially if the ECB doesn’t deliver enough fodder to satisfy the speculative shorts that are forecasting a small cut to the repo rate.
Further reading:
USD/JPY: Trading the ISM Non-Manufacturing PMI
ADP Non-Farm Payrolls: only +139K in February – NZD/USD reaches new highs
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