Events in the Ukraine dominated market sentiment overnight. As Russia consolidated its positions in the Crimea, concerns turned to the prospect for war and the security of Russia’s significant gas supplies to both the Ukraine and Europe. Gas prices shot up overnight and in fact energy prices rose across the board. Certainly Russia’s markets have been hammered -- stocks down about 11 per cent and the Ruble tumbled. In response, Russia's central bank hiked rates 1.5 per cent to 7 per cent.
The issue here is that Russia has threatened the Ukraine gas supply. Not that they’ll cut it off entirely, but that they’ll put an end to the 30 per cent discount the Russians give them. That doesn’t sounds too onerous at this point, but I guess the implied threat is that if the situation escalates it’s not just discounts that will be cut -- and that’s a threat to Europe’s gas supply as well. Russia provides 30 per cent of Europe’s gas.
While Ukraine’s rhetoric is of war, Europe and the US have made it clear that force will not be used. This is good -- it would be a terrible tragedy for one more European tribal dispute to lead to conflict. Having said that, the UK and US are talking about costs -- economic ones -- and the US has noted that the Russian economy, and its financial system, is quite vulnerable to sanctions.
Global equities fell sharply, especially in Europe with the Dax off 2.8 per cent, the CaC down 2.4 per cent and the FTSE100 off 1.6 per cent. On Wall Street, the losses don’t seem so severe, but they are hefty nevertheless. With an hour left to trade, the S&P500 is down 0.6 per cent (1848), the Dow lost 177 points (16,147) and the Nasdaq is off 0.9 per cent (4269). In terms of sector performance, nearly every major sector was in the red although losses were led by energy, financials and tech stocks.
Forex action was light for the Australian dollar, which is little changed at 0.8932 US cents on a 50 pips range. The euro then weakened, losing 40 pips or so to 1.3739 and the British pound followed suit, although the unit fell nearly 90 pips to 1.6662.
Commodities saw strong bidding action in some cases. In the precious metals space, gold was up $30 to $1352 which is a four-month high. Silver too was up 1.2 per cent. Otherwise crude spiked -- WTI up 2.2 per cent to $104.8, while Brent was up 1.7 per cent to $110.98. Copper fell 0.5 per cent.
Rates saw subdued price action trading on a 3 bps range on the US 10-year Treasury note. At the time of writing, the 10-year yield is at 2.60 per cent. The 5-year yield is then at 1.45 per cent and the 2-year at 0.29 per cent. Aussie futures were little changed -- the tens at 96.086, and the threes at 97.18.
Elsewhere, the Crimean crisis overshadowed what was solid economic data. In particular, the US ISM index rose to 53.2 in February, from 51.3. Most of the commentary from survey respondents was very positive. The gist is that activity is bouncing back after weather distortions and we can see that in some of the ISM components -- new orders and backlog of orders both rose solidly. Elsewhere, personal income and spending was robust in January and construction spending held onto to solid gains made in December ( 1.5 per cent), putting on another 0.1 per cent.
In markets today, the SPI suggests our stocks will fall a little -- down 0.2 per cent. So then to the macro flow, the Reserve Bank’s decision is at 1430 AEDT and markets are set on no change. I think that’s right and the chance of a surprise cut is probably low in my opinion. What will be interesting though is the board’s reaction to the recent data flow, and in particular some of the alarmism following recent capex numbers. This is a board that spooks easily and accentuates the negatives. So I won’t be at all surprised to see them become a bit more dovish in this statement.
Prior to the RBA’s decision we get balance of payments data, public spending numbers and building approvals. The first two are important feeds into tomorrow’s GDP result. Looking abroad, the data flow is comparatively minor. In Britain we see another house price series (from Halifax), for the eurozone there’s producer prices, and for the US we get the ISM New York Survey and an economic optimism measure.
Have a great day…
Adam Carr is a leading market economist.
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