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An escalating crisis?
The crisis in Ukraine took a significant turn as President Yanukovich fled the country, leaving Kiev in the hands of the pro-EU protestors. For a time it looked as if the pro-EU and pro-Russian sides of the country would move in the direction of civil war, but this was overtaken by an unexpected Russian development. Russian troops took over key installations in the Crimea, home to the Russian Black Sea fleet and a majority Russian population, sparking a stand off with Western powers.
The impact on global markets was predictable, with equity indices dropping back rapidly, only days after some had reached new all-time highs. Oil prices rose on fears of diminished supply, while gold saw substantial buying as the traditional ‘flight to safety’ trade reared its head again.
The situation remains fluid, especially regarding President Putin’s next move, leaving markets vulnerable to newsflow emerging from the region. Perhaps the key market to watch is crude oil, given that Russia needs the black commodity to be above $110 per barrel to balance its budget. A higher price suits the Kremlin, but it will also weigh on global economic growth as companies pay more to use oil in their operations.
Major global indices find themselves in an odd situation; they have fallen back from recent highs as investors worry about the near-term outlook. However, the economic situation continues to improve, even if US economic data does not look as strong as was the case a few months ago. If the crisis subsides into negotiation, as we must hope it does, then the way could be open for the rally in equity markets to resume.
The reassuring element is that the cutting back of the Fed’s asset purchase programme appears to be proceeding without too much concern. It is odd to look back over the past few months and remember with what trepidation markets regarded tapering. Now, although concerns linger about any increase in the pace, the Fed’s soothing commentary has helped to allay many of the fears.
Central bank moves
I continue to be of the view that central banks are not entirely finished with their attempts to guide the global economy in the right direction. The particularly important one at the moment is the European Central Bank – the European economy is growing, but slowly, and deflation talk is now widespread. The ECB has been held back by German resistance against any idea of buying up sovereign debt from the indebted southern European nations (February’s constitutional court decision in Germany underlined this nicely).
However, the possibility still exists that the ECB will look to unleash monetary liquidity by some form of more specific operation, even if it has to hedge its plans with a number of conditions. EUR/USD remains the forex pair to watch in March as it heads towards $1.38; nearly a high for the year so far. Action from ECB president Mario Draghi could unleash a rally here, but if he dodges the choice once again the euro could drop quickly and surrender much of its recent rally.