Comment: European Markets Higher In Calm Mood; Russia In Spotlight
March 21, 2014 9:55 am
Equity markets in Europe adopt a calm mood Friday, helped by gains in Asian markets overnight. Ongoing geopolitical tensions in the Ukraine together with Fed chair Yellen’s remarks regarding monetary tightening keep us anxious in general but as we head to the end of the week, traders are demonstrating a level of comfort.
The Fed’s bank stress tests released overnight were better than expected, showing US banks are actually in much better shape than many had thought. Tougher sanctions by the US warrant some concern as President Obama noted that although these sanctions stand to hurt the Russian economy, these new stricter sanctions could eat away at global growth. Obama also imposed sanctions on Bank Rossiya, which the US government believe to be the personal bank for senior Russian officials – this led to Russia imposing sanctions on the US too. The escalation here is particularly worrying as rating agencies are now taking action. S&P cut Russia’s rating outlook to negative on Thursday followed by Fitch today. This prompted more than 3% drop for the Moscow stock index and further declines for the Rouble currency.
As a result, Russian bonds rose sharply as yields fell – Putin is currently signing the ratification of Crimea annexation – adding further fuel the fire in the political standoff between the West and Russia. The US is in a position to exert harsher sanctions but that’s not being replicated by the EU who have more to lose due to the closer trade links and reliance on Russia. So far, the EU’s sanctions have been incremental and perhaps not hard enough to hurt Russia’s growth prospects. That’s likely to be the case for some time with the US and Russia likely to be battling it out with the EU standing on the side of the ring, offering support to the US but ultimately, restrained to cause significant damage to Russia for the time being.
For financial markets at the moment, the Fed’s monetary tightening intensions appear to be a bigger deal – Fed chair Janet Yellen indicated the central bank could raise rates as early as April 2015, much earlier than expectations. Her comments shook investors who were resolute with the prospects of low interest rates for an extended period. Yellen however, was right to call for rate increases, if indeed, the US economic fundamentals justify monetary tightening.
With the Fed operating a ballooned balance sheet, cutting stimulus measures need to coincide with monetary tightening or else the central bank risks causing bubbles in the money markets which could be detrimental for the US economy. The Fed’s message is clear; we are taking the punchbowl away and the party is really coming to an end. That’s a sensible move so long as the US economy booms over the next few months. Across asset classes; the USD is on the backfoot after adding gains on the back of Yellen’s comments regarding rate-hikes, whilst US stock futures are indicating a firmer open on Wall Street.
Gold prices are performing well – up around 10 bucks and in a sign of increase risk appetite, core government bonds are losing steam with UK gilts and German bunds both broadly flat. Fed speakers are lining up to speak about policies – later today we have St. Louis Fed head James Bullard and Dallas Fed head Fisher scheduled to speak. Look out for Fed governor Jeremy Stein and Minneapolis Fed head Kocherlakota who was the lone dissent to this week’s decision by the Fed.
Equity markets in Europe adopt a calm mood Friday, helped by gains in Asian markets overnight. Ongoing geopolitical tensions in the Ukraine together with Fed chair Yellen’s remarks regarding monetary tightening keep us anxious in general but as we head to the end of the week, traders are demonstrating a level of comfort.
The Fed’s bank stress tests released overnight were better than expected, showing US banks are actually in much better shape than many had thought. Tougher sanctions by the US warrant some concern as President Obama noted that although these sanctions stand to hurt the Russian economy, these new stricter sanctions could eat away at global growth. Obama also imposed sanctions on Bank Rossiya, which the US government believe to be the personal bank for senior Russian officials – this led to Russia imposing sanctions on the US too. The escalation here is particularly worrying as rating agencies are now taking action. S&P cut Russia’s rating outlook to negative on Thursday followed by Fitch today. This prompted more than 3% drop for the Moscow stock index and further declines for the Rouble currency.
As a result, Russian bonds rose sharply as yields fell – Putin is currently signing the ratification of Crimea annexation – adding further fuel the fire in the political standoff between the West and Russia. The US is in a position to exert harsher sanctions but that’s not being replicated by the EU who have more to lose due to the closer trade links and reliance on Russia. So far, the EU’s sanctions have been incremental and perhaps not hard enough to hurt Russia’s growth prospects. That’s likely to be the case for some time with the US and Russia likely to be battling it out with the EU standing on the side of the ring, offering support to the US but ultimately, restrained to cause significant damage to Russia for the time being.
For financial markets at the moment, the Fed’s monetary tightening intensions appear to be a bigger deal – Fed chair Janet Yellen indicated the central bank could raise rates as early as April 2015, much earlier than expectations. Her comments shook investors who were resolute with the prospects of low interest rates for an extended period. Yellen however, was right to call for rate increases, if indeed, the US economic fundamentals justify monetary tightening.
With the Fed operating a ballooned balance sheet, cutting stimulus measures need to coincide with monetary tightening or else the central bank risks causing bubbles in the money markets which could be detrimental for the US economy. The Fed’s message is clear; we are taking the punchbowl away and the party is really coming to an end. That’s a sensible move so long as the US economy booms over the next few months. Across asset classes; the USD is on the backfoot after adding gains on the back of Yellen’s comments regarding rate-hikes, whilst US stock futures are indicating a firmer open on Wall Street.
Gold prices are performing well – up around 10 bucks and in a sign of increase risk appetite, core government bonds are losing steam with UK gilts and German bunds both broadly flat. Fed speakers are lining up to speak about policies – later today we have St. Louis Fed head James Bullard and Dallas Fed head Fisher scheduled to speak. Look out for Fed governor Jeremy Stein and Minneapolis Fed head Kocherlakota who was the lone dissent to this week’s decision by the Fed.
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