Risk appetite firms

Despite the decision by Crimea’s parliament to formally request accession to Russia markets risk assets performed well overnight, with US and European equity markets registering solid gains. Consequently US yields rose overnight while the USD made gains against safe haven currencies.

Market relief probably reflected the fact that the referendum itself passed without violence while the reaction by the West in terms of sanctions was not seen to have a particularly detrimental impact on sentiment.

China’s decision to widen its currency band also passed with little fanfare given that such a move was largely anticipated. There will be some positive pass through into the Asian session from the gains in asset markets overnight although a degree of caution continues to be warranted given the still precarious situation in the Ukraine and ongoing tensions between Russia and the West.

No relief for risk assets

Perhaps unsurprisingly given the tumultuous build up to the poll the Crimean referendum resulted in an over 90% vote to leave Ukraine and join Russia according to Russian state media. Risk assets were already under pressure leading into the vote and the news is not going to help sentiment in any way, with the West already denouncing the result and Russia seeing it as a validation of its stance. Further sanctions and other punitive measures are likely to be announced leading to a heightening of tensions and increased risk aversion.

Our risk barometer is already well into “risk hating” territory highlighting the intensifying pressure on risk assets and demand for safe havens. Consequently expect the likes of the CHF, JPY and gold to remain under upward pressure and anything with high beta to be under downward pressure.

There is also plenty of data and events to capture the interest of markets this week, with the Fed FOMC meeting capturing top billing. Unsurprisingly no change in policy is expected, with a USD 10 billion taper set to be announced. Fed Chairman Yellen is set to highlight that the bar remains high to any slowing in the pace of tapering while more qualitative guidance is set to be announced.

On the data front US data will remain weather impacted but nonetheless, February industrial production is set to reveal a small gain today while manufacturing surveys will reveal some improvement in March. Additionally housing starts are set to rebound in February. However, Treasury yields are likely to be capped despite more encouraging data as safe haven demand intensifies, leaving the USD also restrained.

In Europe the data flow is less numerous and what there is will support the view that more action is needed by the European Central Bank (ECB) to ease policy. February CPI inflation is set for a downward revision while the German ZEW investor confidence index will slip further.

Calmer market tone ahead of key events

Markets have taken on somewhat of a calmer tone in part due to hopes that discussions between the US and Russia will find some form of solution to the recent escalation of tensions in Ukraine. The nearing of European Central Bank and Bank of England policy decisions today and the US jobs report on Friday have also led to inaction and range trading in markets. Consequently US equities ended flat overnight while risk appetite improved.

Meanwhile, investors are continuing to ignore poor US data attributing it to the weather, with a weaker than forecast February ADP private sector jobs report (139k versus 155k consensus) and February ISM non manufacturing survey (51.6 versus 53.5 consensus), registered overnight. Notably the Fed’s Beige Book repeatedly highlighted the weather impact on US data. Clearly weaker data is not being seen as changing the path of Fed tapering over coming months.

Ukraine fallout

So far most of the damage from the escalating crisis in the Ukraine and growing tensions between the West and Russia has been inflicted on Russian markets but global asset markets are also feeling increasing pain from the fallout. The most recent developments highlight that tensions have worsened further.

Equity markets in Europe were next in line for selling pressure, with sharp declines registered while US stock also dropped, but to a lesser degree. Commodity prices have also felt the shock, with European natural gas prices rising sharply and oil also higher. Gold has been a major beneficiary extending gains to around USD 1350.

US Treasury yields settled around 2.6% while the USD bounced as risk aversion spiked. My Risk Aversion Barometer rose over 3% while the VIX “fear gauge” jumped. Asian markets are likely to feel some pressure today although the impact is likely to be much less significant than elsewhere. Nonetheless, the lack of first tier data releases means that most attention will be focussed on developments in Ukraine over today’s trading session.

Geopolitical tensions to weigh on risk assets

There continues to be a disconnection between rising geopolitical risks as tensions between Russia and Ukraine intensify, and the performance of equity markets. US equities ended the week on a high note despite a bigger than expected downward revision to US Q4 GDP and risk sentiment overall remained supported according to our risk barometer. Other data were helpful for markets as February Chicago manufacturing confidence (PMI) and Michigan consumer confidence came in better than expected. The firmer tone to risk assets will not last, with risk aversion set to intensify today.

Markets continue to give US economic data the benefit of the doubt, downplaying the harsh weather impact on economic data. This is set to continue this week, with the release of a plethora of US data including January personal income and spending and February ISM manufacturing confidence, February vehicle sales, the Fed’s Beige Book, January trade balance and last but not least February non farm payrolls at the end of the week. All of the data will be hit by recent unseasonable US weather and therefore will look weak on balance, but markets will once again not fret a great deal.

There are several other key events this week that will garner market attention including central bank decisions from the Reserve Bank of Australia tomorrow, Bank of England, and European Central Bank on Thursday. Hopes that the ECB will easy monetary policy were dashed somewhat by a higher than expected reading for Eurozone HICP February inflation although there is still a possibility that some easing in liquidity conditions are announced. The RBA and BoE are not expected to change monetary policy settings this week.

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