Financial markets are trading with a slight risk-off tone this morning, as escalating turmoil in Ukraine led to at least 25 protesters being killed overnight, with hundreds more injured, in the worst clash between government and activists over the three month conflict. Investors are looking to park their money in assets traditionally thought of as safe-havens, with emerging market currencies being dumped in favour of the USD and JPY.
The troubling factor for financial markets is that the uproar in Ukraine is no longer just contained to Kiev, with the Lviv region evicting their appointed governor and declaring independence from president Yanukovich’s government. While things have calmed down somewhat this morning, there doesn’t appear to be a quick or easy solution in sight, with Yanukovich now accusing opposition leaders of inciting the riots as an attempted coup, forcing the majority of his opposition into hiding. Despite Russia not intervening in Ukraine for the time being, the Russian Ruble hit a five year low last night and is now trading at 35.78 against the USD, while the USDJPY dipped below the 102 level on yen strength. Oil continues to benefit from the upheaval in Ukraine, with front-month WTI pushing past $103/barrel this morning.
Turning our attention to calmer issues in Europe, on the heels of Britain’s inflation dropping below the Bank of England’s target for the first time since November of 2009, the UK released both claimant count changes for January and the unemployment rate as of December. Expectations had been for the unemployment rate to remain flat from November at 7.1%, precariously close to the BoE’s forward guidance threshold of 7.0%; however, the jobless rate unexpectedly rose to 7.2%, its first increase since February of last year. Tempering some of the disappointing rise in unemployment was the fact that jobless claims in the month of January dropped by a larger amount than expected, printing at -27.6k vs. the median analyst estimate of -20.0k. In addition to the employment figures, the minutes from the last Monetary Policy Committee meeting were released overnight, and not surprisingly showed the board voted 9-0 to leave rates and bond purchases unchanged.
During the meeting Carney did not ask the MPC to vote on new forward guidance, although last week Carney did refocus the guidance on the amount of spare capacity in the economy. With the combination of softer than expected inflation yesterday and the increase in the jobless rate to 7.2% in the three month to December, the pound continues to ease from its 2014 highs, bumping up against previous resistance-now- turned-support in the mid-1.66s against the USD. Corporations that are naturally short GBP might want to think about using this wash-out as an opportunity to cover off a portion of their near-term exposure, while still remaining flexible if things are to deteriorate further and a larger retracement to the mid-1.65s materializes.
Heading into the North American open, economic data on the strength of the housing industry in the US for January was just released. Expectations had been for both building permits and housing starts to moderate slightly from December, although there had been some worries that the readings would come in softer than analysts’ estimates given the sharp drop in homebuilder confidence as witnessed yesterday from the February survey conducted by the National Association of Home Builders. Those worries were indeed substantiated as Housing Starts fell by 16% from over the month of January to 0.88M on an annualized basis, while permits decreased by 5.4% to 0.94M; both readings well short of analysts’ estimates. The good news for the housing industry is that other than the majority of the drop being attributable to severe weather affecting buyer traffic, some of the major concerns for builders are supply related, and have to do with worries about shortage of lots and labour as demand outstrips supply. So despite the drop of builder confidence from the NAHB survey yesterday, and that fact that permits and starts might be soggy for the beginning of 2014, housing prices should be relatively well supported. S&P futures were little changed after the release of the housing data, although have come off the overnight lows that resulted after the blow-up in Kiev and are trading less negative then earlier.
The Loonie is trading heavy this morning, with demand for the American buck driving USDCAD back into the high-1.09s after a dismal wholesale sales print for Canada showed that the value of sales from wholesalers dropped by 1.4% over the month of December. Retail Sales for the Canadian economy in December is also due to be released at the end of the week, and today’s data does little to spark confidence that consumer spending was strong heading into the end of the year, especially if retailers ordered less from wholesalers heading into the holiday season.
Although we’ve already seen a good amount of economic data cross the wires this morning, things aren’t set to slow down with the meeting minutes from the last FOMC gathering set to be released at 14:00EST. The January meeting resulted in the second taper of the Fed’s monthly asset purchases, and came on the back of a soft payroll number in December and emerging market turmoil, giving the markets a fairly good benchmark as to what wouldn’t deter the Fed from altering its taper trajectory. There is no doubt the release of the minutes from January will be parsed to see if there was any discussion around what would constitute the Fed holding off on culling another $10bn at their March meeting, and although we’ve heard from Janet Yellen the economic outlook would have to take a notable change of course, it will be interesting to see if there was anything concrete debated or outlined as to what a “notable” change in outlook looks like.
The implications of more tangible discussions around this issue will allow the markets to decipher as to how close or far the Fed is from delaying the cutting of monthly asset purchases, although we still feel the employment situation will have to take a drastic downward turn, with the Fed favouring to wind down their asset purchases by the end of 2014 and then looking at other methods of supporting asset markets with monetary policy. The DXY is at its lowest level in 2014, but look for more communication from the Fed that the taper trajectory is on course to support the dollar-index and catch a modest bid tone.
Further reading:
EUR/USD Feb. 19 – Steady Ahead of Key US Releases, FOMC Minutes
UK data analysis: Carney has more breathing space to support the fragile recovery
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