The gradual, but continual, tempering of tensions around the situation in Ukraine is allowing risky assets to continue their broad relief rally this morning. Equities have twisted higher across the board with investors fuelling their bets by selling out of the havens that were so in demand on Monday. Oil, gold, USD and JPY are all lower over the past 24hrs.
A press conference from Russian PM Vladimir Putin allowed tensions to slide yesterday. Comments such as “Russia is not considering adding Crimea to Russia” and that there is “no need to send troops to Ukraine yet” allowed investors to add more risk to the table but we are in doubt that there is another shoe, or army boot, to drop. As it appears to us, there is still a number of elements within this crisis that will create further emerging market volatility.
This rally will be extended if the situation remains quiet today in Ukraine and services data from the world’s economies mirror Monday’s manufacturing numbers. China’s services industry has beaten estimates already this morning with its PMI hitting a reading of 51.0, up from 50.7 in January. The Chinese National People’s Congress is currently in full swing in Beijing and with it has come a renewed growth target of 7.5%. There had been some expectations that Premier Li Keqiang would guide China’s growth lower than 7.5% – the target in 2012 and 2013 too – in an effort to enforce his desires to move away from growth at any cost.
We have heard a lot in recent months about quelling credit bubbles in China. Only last week the central bank acted to reduce froth in the banking system by draining $7.9bn of liquidity and the puzzle for Chinese policy makers is clear; softening growth while remaining committed to expansion alongside liquidity withdrawals and a slowing of public spending is a very tricky needle to thread.
As with every PMI day, measures from the Eurozone are due throughout the morning with Italy at 08.45 GMT, France at 08.50, Germany at 08.55 and the Eurozone-wide measure at 09.00. The UK number is due at 09.30 with strong growth expected once again. The US ISM is due at 15.00 and a strong number will galvanise hopes of a strong payrolls number this Friday.
The rate of expansion in the UK’s construction sector remains close to record breaking levels but was slightly lower in February than January as weather issues altered delivery time frames and closed sites. Seasonal issues aside, this figure reinforces the strength of a sector that was seemingly on its back in 2012; February marks the 10th consecutive month of growth. Employment has remained strong as sector confidence around new orders and continuation of strong output has solidified. According to this survey, 59% of companies expect output to continue rising through the year against 10% who expect a fall. This is another strong figure overall and, alongside yesterday’s manufacturing number, will foster real belief of a very strong GDP number for Q1 if continued.
Australian data has once again surprised to the high side overnight driving AUDUSD back towards 0.90. GDP in Q4 advanced at a rate of 0.8%, beating the 0.7% expectation with household spending increasing by 0.8%, exports growing by 2.4%, but with machinery and equipment falling 8.8%. While a rebalancing is taking place, corporates who have tried to stick out the tough times are starting to rein in spending. Capital expenditure by domestic businesses fell 5.2 per cent in Q4 of 2013, a much wider drop than the 1.3 per cent fall the market was looking for and you’d have to go back to 2009 to find a similar decline.
Away from the PMIs we have Eurozone retail sales this morning at 10am which are expected to recover from a drastic 1.6% fall in December by 0.8%. In central bank news we have the Bank of Canada’s rate decision at 3pm with little movement expected. OIS swaps put the likelihood of a cut to 0.75% at around 4%. The Fed is also due to release its Beige Book of regional surveys this evening; investors will be drilling down into that to see whether there is any appetite for a reduction in the pace of tapering and just how much the regional Federal Reserves believe the recent weather chaos has hurt the US economy.
