Ukraine Tensions To Persist
On Tuesday, major equity markets rallied while currencies appeared distracted by Russia’s invasion of Ukraine but Wednesday showed signs of tenuous stability. Economic factors began to take hold in early morning trading as soft economic news from the European Union weighed on the global economy.
In Russia, equity markets mounted a mild rally on Tuesday only to turn down on Wednesday. After striking a new low against the USD on Monday, the Russian rouble posted modest, fragile gains against the dollar on Wednesday.
Russian Rouble Down 9 Percent vs. USD in 2014
Betting against the rouble has been a winning strategy in 2014. The currency has lost 9 percent against the USD and investors suggest volatility is likely to persist through the March 30th elections in the Ukraine.
The central bank was called to action on Tuesday as foreign investors fled the currency and Russian equity markets. The bank invested $11.4 billion in foreign currency reserves in support of the rouble. The threat of US and western sanctions weighs heavily on Russian markets.
Russian equities fell 12 percent on Monday but picked up some forward momentum on Tuesday, up 5 percent, before sliding back on Wednesday. Sparked by a flight to relative safety, there exists an uneasy downward trend in Russian equity markets.
Heated European and American sanction discussions can only weaken Russia’s currency and equity shares. Russia’s targeted inflation rate is 5 percent in 2014.
Bank of Canada Holds Rates
Citing stronger than expected revisions to early 2013 growth data, the Bank of Canada opted to hold the line on its 1 percent benchmark interest rate. The prevailing rate has not flinched for three years. Speculation about low inflation seems a secondary concern to bolstering the country’s export balance.
The threat of a trade sanctions might bolster Canada energy exports to Europe. The soft CAD should improve the demand in the event of a continued diplomatic stalemate.
Canada’s target inflation rate is 2 percent and while January tipped in at 1.5 percent in January, much of the rise is credited to increased energy demand. The softer CAD has been a boon to exports.
The Bank of Canada projected growth of 2.5 percent in 2013 although 1st quarter projections are guarded.
European Commission Singles Out Italy and France
In a report released in Brussels on March 5, the European Commission added Italy and France to elevated watch list status while lowering its risk assessment on Spain’s debt. The Commission identified several countries, including Germany and the UK, with significant imbalances, but admonished Italy and France, repeat offenders in missing targets. Croatia and Slovenia joined France and Italy in the Commission’s endangered status.
The Commission called for “decisive” action by the at-risk economies. France is the second largest economy in the EU and Italy the third largest.
Italy responded that the agenda of new Prime Minister Matteo Renzi, which was to be released on Wednesday, would meet Italy’s targets and more. Renzi’s platform is expected to address abnormally high unemployment, offer more affordable housing and a reduction in borrowing costs. The European Commission stressed the importance of tighter constraints to bring debt under reasonable limits, a policy admonished by Renzi.
The performance of France seemed to draw the ire of the Commission. Given two additional years to reduce its budget deficit below the 3 percent of GDP ceiling, France has failed to impress the Commission.
Citing high labor costs undisciplined spending and a general lack of competitiveness, the Commission described France as “an unfavorable business environment.”
France responded that the bulk of its budget cutting initiatives were scheduled between 2015 and 2017. Finance Minister Pierre Moscovici indicated that improvements to France’s competitive capabilities were “in the pipeline” but failed to elaborate.
Meanwhile investors continue to flee emerging economies in favor of established economies.
Euro – USD – Down 0.08 percent to 1.3731
USD – GBP – Up 0.35 percent to 1.6722
USD – CAD – Down 0.38 percent to 1.1046
USD – Rouble – 36.0265
USD – Yen – Up 0.15 percent to 102.35
DJI – Down 24.43 points (0.15 percent) to 16,371.45
SPX – Up 0.97 points (0.05 percent) to 1,874.88
Nasdaq Composite – Up 5.379 points (0.12 percent) to 4,357.351