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Risk sentiment in financial markets was notably shaky throughout the majority of yesterday’s North American session, with investors electing to shed exposure to high-yield assets as small global tremors worried participants something larger could be waiting in the wings.   More rumors around another Chinese corporate entity defaulting on their bonds caused concern that financing deals based on copper stockpiles could unravel, causing a fall-out in the metal as investors look to hold cash rather than the assets tied to the value of the physical product.   Front-month copper futures were clobbered yesterday, down almost 3% and below the $3.00 mark, which hampered positive price action in commodity-correlated currencies such as the AUD and CAD.

Elsewhere around the globe, the escalating tensions in the Crimea region of Ukraine have failed to subside, with the new government of Ukraine beginning “live-fire” tank exercises ahead of this weekends’ planned referendum.   The sabre-rattling continued with Russia condemning the planned aid from the US to Ukraine as illegal, saying that it was funding for an illegitimate regime that seized power, warning Washington on the consequences of supporting what Russia views as the radical elements of Ukraine.   The geo-political barbs did little to inspire confidence for financial markets, with the S&P dumping by 0.51% , while the VIX increased to make a run at the 15% handle.

A continuation in risk adverse sentiment permeated throughout the overnight Asian session, as concerns over credit markets in China prompted a flight-to-quality, with some analysts in China predicting that more corporate defaults could emerge as the Chinese government pursues it reform process.   Reports also show that Beijing might be getting a bit nervous about hitting its growth target of 7.5% this year, stating that the PBoC is ready to lower the reserve requirement ratio for banks if GDP growths looks likely to slip below their 7.5% threshold.   The fallout overnight was a Nikkei stock index that closed lower by 2.59%, while the Hang Seng ended down by 1.65%.  

With little in the way of important economic data, the negative emotion from Asia has infiltrated the European session, with the major bourses well situated in the red way heading into the North American hand-off.   The new Ukrainian Prime Minister Yatsenyuk is visiting Washington today to further talks with the US on aid potential, something Russia is surely not happy about.   Yatsenyuk has warned that Russia is amassing troops near Ukraine’s borders ahead of this weekend’s referendum, but also stated that the government of Ukraine would not launch a military campaign in Crimea as it would leave the rest of its eastern border exposed.   Market participants will be keen to watch the geopolitical developments between Russia and the US in the coming days, as the warnings from Russia about western involvement in Ukraine ramp up, while the US House passes a resolution to seek sanctions against Russia.  

With a lack of tier-1 economic data from North America today, price action of equities and currencies are likely to follow headline developments out of eastern Europe.   S&P futures are telegraphing a second day of lower prices when the opening bell rings, investors clearly paying up for those assets considered safe-havens.   The Loonie is limping lower this morning, with USDCAD pushing into the mid-1.11s as copper’s slide continues and geopolitical woes have traders shaving exposure to the commodity-linked currency.   Also not doing the CAD any favours, front-month WTI is unable to stem its recent decline, skidding another 1.5% this morning to trade south of $98.50 barrel in early morning price action.   Gold has been able to generate some positive flows as risk appetite wanes, with the yellow metal changing hands at $1,360/ounce ahead of the opening bell.        

Looking ahead to  tomorrow, retail spending during the month of February for the US economy will be released at  8:30EST, with forecasts that some of recent consumer weakness will abate, with the headline reading expected to increase by 0.2%.   If the numbers should come out in-line with what analysts have estimated, the increase in retail spending won’t totally recoup the January loss of 0.4%, but will help ease concerns strength in consumer spending will return as some of harsh winter weather conditions moderate in the coming months.   With the stronger than forecast employment situation figures from last Friday, it is likely that optimism flowed through to consumer pocket-books, and retail spending will recover from the dismal January number.   Anecdotally, the struggle of retail juggernauts like Radio Shack, Sears, and J.C. Penny don’t inspire confidence in the recovery of the middle-class consumer,   and would caution there could be more underlying weakness than what can be just blamed on the weather.   That being said, some of this weakness can be attributed to the rise of internet shopping with the likes of Amazon, however the shuttering of brick and mortar storefronts across the continental US doesn’t quite excite confidence the retail spending segment of the economy is poised for a sharp takeoff.   Regardless, as one of the biggest economic data releases this week, make sure to speak with your dealing teams ahead of the numbers, as a better than expected reading could help the American dollar continue to move off its lows from last week.

Further reading:

Watching for bullish price action at USDJPY key daily level

EUR/USD March 12 – Firm Euro Shrugs Off Weak Manufacturing Data