The Monday Report

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By Greg Peel

The world is now waiting to see just what will happen in the Black Sea region following last night’s referendum in Crimea. Polls suggest the local population has voted 95% in favour of exiting Ukraine and joining Russia, the Ukrainian government has branded the vote illegal, the West has sided with Ukraine and Russian forces are amassed along the border.

The uncertainty of what happens next was a driving factor in Friday’s rout in Bridge Street, which included a reversal of Thursday’s trade in which the ASX 200 rather strangely rallied on the local employment data and ignored both Ukrainian tensions and the weak Chinese data for February. A big sell-off on Thursday night on Wall Street settled that score, and so we tumbled 1.5% on Friday.

Having already adjusted for the risks, Wall Street was less panicked but still weak on Friday night. The Dow fell 43 points or 0.3% while the S&P lost 0.3% to 1841 and the Nasdaq dropped 0.7%. Ukrainian uncertainty was blamed for the weakness.

The VIX volatility index on the S&P 500, known as Wall Street’s fear index, rose another 10% on Friday to 17.8 – still not into nervous territory (below 20 is considered benign) but rising nevertheless. Gold rallied another US$9.70 to US$1382.70/oz and is once again playing the part of a safe haven against geopolitical risk. The other safe haven, US Treasuries, had a quieter session. The ten-year yield is steady at 2.64%.

Ukraine notwithstanding, Americans are also becoming gradually less confident about the US economy as was again evident on Friday in the fortnightly Michigan Uni measure of consumer sentiment. It fell to 79.9 from February’s final reading of 81.6 when economist had expected a rise to 82.0.

A report from the International Energy Agency suggested Iraqi oil production rose to a level in February not seen since 1979. With North American oil production also significant, the news put pressure on oil prices on Friday night but the counter of the spectre of oil sanctions forming some part of a West/Russia stand-off meant Brent crude rose US$1.24 to US$108.27/bbl and West Texas rose US80c to US$98.89/bbl.

Base metals mostly settled into watch and wait mode on Friday albeit after solid falls last week, copper managed to scratch back 1% and lead rose 1.2%. After staging a snap-back late last week, spot iron ore fell US$1.40 to US$110.10/t.

The Aussie is off 0.3% from Friday to 0.8998 and the SPI Overnight fell 18 points or 0.3%.

China took a further step towards financial market reform over the weekend by expanding the trading band for the renminbi twofold. Beijing maintains control over the currency by only allowing a tight trading range rather than a free float, but as of today that range expands to 2% from 1%. In 2012 the band was expanded to 1% from 0.5%.

The move comes in the wake of longstanding criticism from China’s trading partners that the renminbi is artificially undervalued, thus providing China with an advantage in export markets. Beijing has recently engineered devaluation of the renminbi in order to force out speculators ahead of this weekend’s announcement. By allowing appreciation within the expended band, Beijing has taken another step towards an ultimate free float of the Chinese currency, in line with the developed world.

Weaker Chinese data in the past week and Beijing’s clear intentions to push through reforms have led to broker downgrades of China 2014 GDP forecasts, with BA-Merrill Lynch in particular moving on Friday to cut its expectation to 7.3% growth from a previous 8.0%.

The Chinese story and the situation in the Ukraine have drawn focus away from this week’s Fed meeting, which will feature the first press conference for Janet Yellen. While no change to policy is expected at this stage, the market will nevertheless be keen to hear just what the Fed’s take is on the weather argument or if the central bank does actually see a slowing in the US economic recovery, which might ultimately translate to a slowing in the pace of Fed tapering.

US data flow this week sees industrial production, housing market sentiment and the Empire State manufacturing index tonight, followed by the CPI and housing starts on Tuesday. Wednesday it’s the Fed meeting and Thursday it’s the Conference Board leading index, existing home sales and the Philadelphia Fed manufacturing index. Friday is “quadruple witching” on Wall Street, meaning expiry of quarterly equity derivatives.

Bridge Street also sees an index option expiry this Thursday while Australian data this week include vehicle sales today and the minutes of the last RBA meeting tomorrow. Premier Investments ((PMV)) and Myer ((MYR)) will report interim earnings this week.

China will report February property prices tomorrow.

But all will hinge on Crimea. The fallout will likely not be known until European and US markets open tonight so we may see a quieter session on Bridge Street today.

Rudi will appear on Sky Business today at 11.15am, on Wednesday at 5.30pm and on Thursday at noon and again on that day between 7-8pm for the Switzer Report. On Friday he will appear on Your Money, Your Call – Bonds versus Equities 7-8pm on the same Sky Business Channel.
 

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