Ukraine fears dominate European markets as Moscow bolsters troops along border!

Week commencing Monday 24th March 2014

This week in Brief

  • In the UK we have retail sales and CPI to look forward too, with CPI expected to come in flat on the month and retail sales set to recover from last month’s disastrous posting. All in all it could be a positive week out there for the UK economy and Sterling.

  • In the US we have the all-important final Q4 2013 GDP release, with analysts expecting this figure to 2.7% from 2.4% in the preliminary release.

  • In Europe we have a swath of PMI releases to watch with the potential to see French PMI’s blast back out of contraction. Ukraine remains the most important geo-political event of note with investor sentiment remaining on edge as the situation develops.

Market Themes & Current Events

The UK government has hailed new jobs figures showing a record number of people in work, the highest since records began in 1971. The latest figures from the ONS put total number of people now currently in work within the economy just surpassed 30 million, up 459,000 on a year ago. Meanwhile, unemployment has fallen by 63,000 in the quarter to January to 2.33 million, a rate of 7.2%. Diving into the figures, It seems that the government’s plan to shrink government is working, with Public sector employment having fallen by 159,000 to 5.5 million, the lowest since December 1999, although most of the reduction was explained by Royal Mail workers moving to the private sector because of the postal group's privatisation. Also, The number of people classed as economically inactive, including long-term sick, those looking after a relative or who have given up looking for work, fell by 19,000 to 8.9 million. That said, youth unemployment remains dangerously high with nearly 1 million out of work or in temporary employment. So, not all rosy in the land of hope and glory then!

Over in the US, The new Federal Reserve chairman, Janet Yellen, sent Wall Street sliding last night in her first public outing since taking on the role as she said interest rates could start to rise about six months after quantitative easing comes to an end. The rapid improvement in the jobless rate in the US has surprised the Fed just as it caught out the Bank of England and its Governor, Mark Carney, who had to rewrite his own guidance which had been based around a 7 per cent unemployment threshold. Carney set that target last August when unemployment was at 7.8 per cent, however it has since plummeted to 7.2 per cent, where figures last week showed it had held for a second consecutive month. Also last week, the Fed said the US economic recovery was strong enough for the central bank to continue reducing its bond-buying stimulus measures by USD10bn a month. This means that beginning in April, the Federal Reserve will add to its holdings of agency mortgage-backed securities at a pace of USD25bn a month rather than USD30bn a month, and will add to its holdings of longer-term Treasury securities at a pace of USD30bn a month rather than USD35bn a month.

Over in the far east, Japan’s exports rose 9.8 per cent last month from a year earlier as shipments recovered from the usual winter seasonal slowdown, data from the Japanese Ministry of Finance has showed. The country posted a trade deficit of 800.3 billion yen, higher than the 590 billion yen deficit expected but well below January’s record trade gap of 2.79 trillion yen. The report showed in February, exports rose 9.8 percent to 5.8 trillion yen on shipments abroad of refined fuels as well as automobiles and plastics. Imports grew 9.0 percent to 6.6 trillion yen, largely on higher purchases of liquefied natural gas and electronics parts. All in all it seems that “abenomics” is working for the world’s third largest economy!

Finally moving back to Europe, US President Barack Obama is scheduled to travel to Europe this week to consult with its NATO allies, while Russian troops are massed along virtually the entire Ukrainian border. Worryingly, the number of troops is about double what it was when Moscow’s defence ministry announced that armed forces would hold exercises near Ukraine. As Russian President Vladimir Putin completed the annexation of Crimea, the Black Sea peninsula, Western nations and Russia exchanged economic sanctions, raising concern about an escalation of the crisis. This comes as the US authorised and imposed sanctions on 27 Russian officials and four Ukrainians. He has also authorized, though not implemented, potential future penalties on Russian industries, including financial services, energy, metals and mining, defence and engineering. The Ukrainian crisis remains a big drag on investor sentiment, and by far the most important geopolitical event that is dominating financial markets.

GBP This Week

We have a quite important week ahead for the UK with the CPI measure of inflation set to be released alongside the retail sales report. Starting then with inflation, many analysts are expecting to see it continue its recent downward trajectory. Given that inflation is probably the most prominent indicator of whether the Bank of England are able to either tighten or loosen monetary policy given that price stability is its primary mandate. Should inflation be well above 2%, there is an likeliness that interest rates could need to rise to bring it back in line, whereas a period of disinflation which threatens possible deflation can cause looser policy, as seen recently in the Eurozone. We feel that this is unlikely in the UK, yet we are looking for CPI to plateau at some point to give us an idea of when Mark Carney is going to see interest rate hikes as relevant. Estimates therefore point towards a further fall in this figure, towards 1.7% following the 1.9% rate seen last month.

Moving to Thursdays retail sales figure, market estimates point towards a move back into positive territory with a figure around 0.5% following a fall of -1.5% in last month’s release. This should see some significant impact on markets, especially is we see a print at or above these expectations. This is mainly due to the expansion of the Bank of England’s forward guidance model, where the BoE will be looking at a lot more wide ranging indicators such as earnings growth and consumption to derive an outlook for when rates should be increased.

USD This Week

The most important US release of the week comes on Thursday, when the final GDP reading for Q4 2013 is released. Given that this is the final reading of Q4 2013, there is the possibility that markets take any shock lightly given the new focus upon 2014 figures. However, with a weather driven slowdown in Q1 hurting the economy, a strong Q4 base would be welcome to build upon ahead of next month’s Q1 figure. Market estimates point towards a rise in this figure to 2.7% from 2.4% in the preliminary release.

We will also be watching CB consumer confidence, which is due out on Tuesday. Last month saw a substantial fall in this index, yet this came off the back of a particularly strong figure above 80, which has only been achieved four times in the last 6 years. The expectations are for noticeably smaller move this month, where forecasters are looking for a moderate rise to 78.7 from 78.1 for February.

EUR This Week

In Europe we are looking forward to seeing how the PMI figures and German Business Climate indicators effect the Euro’s performance, with the first indicator of note coming in the form of manufacturing and services PMI for the Eurozone. Whilst important, the markets tend to move most on the manufacturing figures given the dependence on the industry within the major economies such as France, Italy and Germany. The most important of these is the German manufacturing PMI, which tends to be one of the core drivers of growth within the Eurozone. Also be aware that with the French manufacturing sector approaching the 50 mark, any move above this level would likely draw significant attention in the markets.



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