The main news yesterday was the increase in geopolitical risk after a Malaysian plane crashed near the Russian border in Ukraine. Reports are that 295 people were aboard MH17 when it crashed in eastern Ukraine. The government in Ukraine has blamed the rebels claiming they were assisted by Russia, though Russia has strongly refuted these claims. Russia had plans to counter the latest US sanctions but the events of yesterday lift tensions to a completely new level.
The news of the crash sent markets on a wild ride in the afternoon. Markets sold risk and headed for classic safe havens with Gold up USD20 to USD1320, Crude Oil up USD2 to USD103 and the S&P 500 down 23 points – the most since April. Meanwhile, the VIX index (a measure of volatility and therefore risk) was up by 32%. There were further tensions in the middle east as Israel launched a ground assault against Hamas in Gaza.
There was very little out yesterday to have a direct impact on sterling, and as a result we saw a tight range and a general drift lower as general US dollar strength prevailed in the afternoon session. Deputy Governor of the Bank of England, Sir John Cunliffe, commented that regulators are looking at hedge funds liquidity and disclosures of this to investors. This falls within his remit on financial stability where the inability to redeem could disrupt systemically important markets, particularly with emerging market funds and markets where a small number of funds dominated.
Eurozone CPI for June came in as expected at 0.1% which had little impact on the market and left the euro continuing to look weak. The central banker Hansson stated that asset purchases are not imminent or necessary right now, suggesting a further rate move might come before any quantitative easing. The next potential bump in the road to European banks’ recovery will be the preliminary stress test findings which are now due out in September or October.
Vitor Constancio of the ECB commented that some banks will fail this ECB asset review despite the fact that banks have strengthened their balance sheets by some EUR200bn since the last round. The strong euro has played a part in the improvement of market sentiment, highlighting the balancing act faced by the ECB in relation to its currency – too strong and it affects industry, too weak and sentiment and banks struggle.
The US held the majority of the data yesterday, with the July Philly Fed survey showing a great headline number of 23.9 from expectations of 16.0. There was also a good increase in new orders, but a disappointing drop in investment expectations. June housing starts came in below expectations at 0.9m against 1.0m showing that the sector is still not as strong as has appeared recently. The employment figures continued a trend of improvement, with initial jobless claims down at 302k compared with forecasts of 310k. Overall, the data was positive and the US dollar is on the front foot on the back of this and the flight to safety. The Michigan consumer sentiment could further bolster US sentiment if a further improvement to 83 is shown this afternoon as expected.
The Bank of Japan released the minutes of June’s monetary policy meeting raises overall economic view for first time in 6 months. Most members shared the view that the BoJ would continue with quantitative easing to achieve the price stability target of 2 percent for as long as necessary. The majority view is that the impact of QE is firmly taking hold supporting both firms and household spending. Generally this was as expected and has been moderately supportive for the yen, though the greater impact has been from the flight to safety.
