Is the relief seen in risk assets premature?

Whether the relief seen in a number of risk assets was genuine belief that the Russian, Ukraine and G7 tensions were appeased by the modest actions of the EU and US is yet to be seen, but this good will could prove to be premature.

In fact, the key reason why I feel we saw strong relief was actually the idea that many members of the macro community were appeased by the widening of the trading band, as it subtracts from the theory that the weakness in the CNY was down to growth fears. The fact the PBOC has tried hard to keep the fix stable is also positive, although we’ve seen fairly volatility moves today in CNH (offshore renminbi), with the pair up 90 pips today and fast approaching the 6.20 level; many in the market see as a huge line of pain.

Don’t unwind geo-political hedges just yet

The gold rally reached $1388 yesterday, but as the good will came into European stocks, traders took risk hedges off the table and gold actually closed below Monday’s low, printing a bearish outside day. This can be a powerful signal that a reversal is on the cards and we could see a move to the $1355 to $1350 region, however it’s too early in my mind to be fully unwinding political hedges.

We should hear more from Vladimir Putin today and this could be key for sentiment in today’s session; however what’s important is that he still doesn’t recognise Ukraine as having a legitimate government, while he also feels he has the right to protect the Russian ethnic population in the east of Ukraine. We also heard from the Romanian president that Russia is creating a chain of conflicts around the Black Sea to help rebuild the former Soviet Union, suggesting Moldova is in ‘great danger’. We already know that NATO has been monitoring the situation in the region. It seems there are number of countries in the region that are feeling fairly vulnerable right now and the actions from the EU and US won’t have installed any real confidence here.

Japan has been one of the more vocal nations of late and today detailed that it won’t start planned investment talks with Russia. This is not great for Russia, given Japan is still a top-ten contributor to investment in Russia and there are a number of companies which are extremely profitable in Russia. So while there are no plans to penalising Japanese companies who operate in Russia, it’s worth pointing out that this is one of the measures that could be imposed, although this will more than likely be aimed at US and EU companies first. Still, this hasn’t affected the Nikkei and the market is up 1%, while USD/JPY seems heavy in comparison.

Negative cash rates still supporting the yield trade

In Australia we’ve seen the ASX 200 put on 0.5%, with the banks and miners both seeing good gains. The fact the China CSI 300 futures are flat would be helping to a degree, although the Australian market is still trying to digest a backdrop where rates could be going up again one day. Despite a call for a May hike from one local economist, the market still seems comfortable with a view that rates will stay on hold for a very long time. We still have negative real cash rates, although if you adjust the commercial banks variable rate and bond yields, they are still positive across the curve. This should keep the yield trade from unwinding at any great pace in the near-term, although if the market starts feeling later in the year that rates will start going up at a faster pace, we could see banks underperforming.

Today’s RBA minutes haven’t really shed any new light, although it was noted by traders that there are signs that low rates are supporting activity. The AUD is looking better bid against the greenback and even printed a bullish outside day against the NZD, although we haven’t seen any major follow-through today. I wouldn’t be surprised to see a move to the 1.0700 in AUD/NZD despite the RBNZ having the highest real rates and being the central bank that will be doing all the lifting in the G10 currency space over the next year.

European market calls are flat and we are likely to see fairly subdued trade until we get a clearer idea around Vladimir Putin’s actions and thoughts. In terms of economic releases, we get inflation data out of the US, while Mark Carney speaks in a lecture in late US trade.

Keep an eye on the Italian MIB, which is clearly the developed market to be leveraged to globally right now and looks ominously poised to break the key 21,000 level. Strength in these peripheral equity markets is one of the reasons why the EUR looks destined to break 1.40. Today’s ZEW survey of analysts will be interesting, but it’s clear that the ECB is going to be the central bank who are going to have to do something fairly significant to weaken the EUR at some stage or risk doing lasting damage to the economy. Any moves to 1.4200 (for EUR/USD) should be excellent trading opportunities, given the threat of currency fighting rhetoric.  Moves to 1.4500 represent a level where there will be near panic in the peripheral of Europe, and one has to think that Mario Draghi will have to pull another rabbit out the hat and do whatever it takes to stop deflation.

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