Comment: Risk Erodes As Ukraine Tensions And Yuan Decline Rattles Sentiment
February 28, 2014 7:35 am
European equities are paring early gains Friday, thwarting the Stoxx600’s chance to post its biggest monthly gain since July. The Stoxx600 index kicked off the session a little firmer than where it is now – off around 15 points. That said, for the month of Feb., so far, booked a gain of 4.7%. Other assets are declining; gold is off near 6 bucks, oil prices are sliding and core government bonds are now inching higher in a sign of eroding risk appetite. FX markets, yen is stronger the USD and EUR seems steady. USD losing a bit of steam following Fed chair Yellen’s uninspiring testimony to the Senate overnight.
US markets rallied strongly in the previous session – the S&P500 reached a record high, hitting 1854, beating its high in January following a spate of upbeat corporate earnings out of the US. Asian markets were beset by their own regional issues; Japan’s inflation data fell short of expectations though retail sales and industrial output were slightly better.
In China, the country’s Yuan currency continued it downward spiral versus the USD, now at levels not seen since last May. The tightly controlled currency appears to be reacting to a wave of internal pressures – the PBoC this week said the decline is due to market forces and should not be over-interoperated however for anxious investors worried about China’s economic outlook and ballooning property market, the decline in the Yuan, if pronounced, is a worrying prospect.
On Thursday, new Fed head Yellen took the stage at the Senate banking committee but her comments yielded little fresh information regarding monetary policy. Yellen still reckons that poor weather conditions in the US this winter are to be blamed for the deterioration in major economic indicators however the market is unconvinced by this. The string of poor US data is now worrying with housing activity showing signs of slowing – a particular concern for the market given that housing is the notable driver of the recovery in the US.
Yellen also did little to suggest that monetary policy will be adjusted in the face of deteriorating economic fundamentals – she will stay on course with tapering of the bond buying programme, famously set out by her predecessor Ben Bernanke. The market is now of the view that with US economic data showing signs of weakness, further tapering is perhaps not justified. However, Yellen clearly is showing no change in her stance with another tranche of tapering expected next month.
Onto European markets, equities are steady but have since the open, fell into negative territory on the back of the decline in the Yuan and more significantly for Europe, the ongoing tensions in Ukraine. With Russian armed forces on ground in Crimea, markets are worried about a drawn-out affair with the involvement of Russia and western powers. Ukraine desperately needs economic aid but with Russia holding cash back as it believes the new leadership who toppled Yanukovych is not legal. At the same time, the IMF and the EU, both of which are willing to provide aid, would only do so with strict conditions which is likely to devalue the Ukrainian currency, making it difficult for Ukraine’s new leaders to service debts.
We also have economic data out of the euro zone which will be under scrutiny – harmonized inflation is expected to come in at 0.7% but further weakness would raise concerns about deflation which could see the ECB respond with a rate cut next week. At the same time, we have unemployment data out of the euro zone which again, is expected to highlight the difficult situation of the wider euro-area.
Although we are seeing tepid growth in nations such as Spain, unemployment remains stubbornly high. It’s likely that Mario Draghi, head of the ECB, will be under scrutiny at the meeting next week regarding the unsustainable level of unemployment across the region. Looking ahead, we also have key US economic indicators in the shape of US Q4 GDP (second release) and Chicago PMIs, followed by the Michigan confidence report and pending home sales – all of which will be under the spotlight for further clues over the health of the US economy.
European equities are paring early gains Friday, thwarting the Stoxx600’s chance to post its biggest monthly gain since July. The Stoxx600 index kicked off the session a little firmer than where it is now – off around 15 points. That said, for the month of Feb., so far, booked a gain of 4.7%. Other assets are declining; gold is off near 6 bucks, oil prices are sliding and core government bonds are now inching higher in a sign of eroding risk appetite. FX markets, yen is stronger the USD and EUR seems steady. USD losing a bit of steam following Fed chair Yellen’s uninspiring testimony to the Senate overnight.
US markets rallied strongly in the previous session – the S&P500 reached a record high, hitting 1854, beating its high in January following a spate of upbeat corporate earnings out of the US. Asian markets were beset by their own regional issues; Japan’s inflation data fell short of expectations though retail sales and industrial output were slightly better.
In China, the country’s Yuan currency continued it downward spiral versus the USD, now at levels not seen since last May. The tightly controlled currency appears to be reacting to a wave of internal pressures – the PBoC this week said the decline is due to market forces and should not be over-interoperated however for anxious investors worried about China’s economic outlook and ballooning property market, the decline in the Yuan, if pronounced, is a worrying prospect.
On Thursday, new Fed head Yellen took the stage at the Senate banking committee but her comments yielded little fresh information regarding monetary policy. Yellen still reckons that poor weather conditions in the US this winter are to be blamed for the deterioration in major economic indicators however the market is unconvinced by this. The string of poor US data is now worrying with housing activity showing signs of slowing – a particular concern for the market given that housing is the notable driver of the recovery in the US.
Yellen also did little to suggest that monetary policy will be adjusted in the face of deteriorating economic fundamentals – she will stay on course with tapering of the bond buying programme, famously set out by her predecessor Ben Bernanke. The market is now of the view that with US economic data showing signs of weakness, further tapering is perhaps not justified. However, Yellen clearly is showing no change in her stance with another tranche of tapering expected next month.
Onto European markets, equities are steady but have since the open, fell into negative territory on the back of the decline in the Yuan and more significantly for Europe, the ongoing tensions in Ukraine. With Russian armed forces on ground in Crimea, markets are worried about a drawn-out affair with the involvement of Russia and western powers. Ukraine desperately needs economic aid but with Russia holding cash back as it believes the new leadership who toppled Yanukovych is not legal. At the same time, the IMF and the EU, both of which are willing to provide aid, would only do so with strict conditions which is likely to devalue the Ukrainian currency, making it difficult for Ukraine’s new leaders to service debts.
We also have economic data out of the euro zone which will be under scrutiny – harmonized inflation is expected to come in at 0.7% but further weakness would raise concerns about deflation which could see the ECB respond with a rate cut next week. At the same time, we have unemployment data out of the euro zone which again, is expected to highlight the difficult situation of the wider euro-area.
Although we are seeing tepid growth in nations such as Spain, unemployment remains stubbornly high. It’s likely that Mario Draghi, head of the ECB, will be under scrutiny at the meeting next week regarding the unsustainable level of unemployment across the region. Looking ahead, we also have key US economic indicators in the shape of US Q4 GDP (second release) and Chicago PMIs, followed by the Michigan confidence report and pending home sales – all of which will be under the spotlight for further clues over the health of the US economy.
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