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Political tensions hit Asian stocks

It’s been a classic risk-off day in Asia, with US treasuries moving down five basis points, stocks under pressure and good buying of USD, CHF and JPY.

Notably, the commodities complex has risen; with brent and gold finding buyers, although for very different reasons. EUR bulls will have mixed feelings today as higher brent prices feeds into increased European headline inflation (brent makes around 15% of the inflation basket), while EUR will find sellers given the risk-off moves seen in the market. With EUR/USD lower on the day, the risk-off theme seems to be getting the upper hand.

The situation in the Ukraine is evolving seemingly by the hour and is at critical juncture. Ultimately the market wants to know to what extent the West will impose economic sanctions on Russia if there is bloodshed and further deterioration. From what we seeing right now, the scene has been set and the key personnel are in place; the orders just need to be given.

Importantly, Russia relies heavily on Western capital and investment, so either Vladimir Putin feels the West will not act or he doesn’t seem to care. With inflation running above 6% and growth under 2%, you would think the Russian central bank would be fairly concerned at the falling RUB, so the prospect of intervention would be increasing.

Ukraine at the heart of the moves today

The situation in the Ukraine is clearly the most pressing issue for markets and will trump all else this week.

Money managers would have spent the weekend brushing up on their Russia/Ukraine/Crimea knowledge to impress clients, and now we are all political analysts again. However, in uncertain times the buyers will stand aside and the shorts come in in bigger size knowing it’s easy to move markets lower in this environment.

Invariably many will be buying this dips, but on an index level I would stand aside and wait for clarity to develop as you know this market can go lower, very quickly, if geo-politics deteriorates and US data doesn’t show any signs of a pick-up.

China is also a key region to watch as usual. On Wednesday we get the National People’s congress (NPC) and we could get revisions to the GDP target, while many are expecting a widening of the daily trading band to 2%.

The new budget will also be laid down. I actually think China could be a shining light this week and would be keen to buy the China A50 index if it wasn’t in a downtrend. Data around the economy continues to show a fairly tepid picture with the official PMI (out on Saturday); pulling back 0.3 points to 50.2; however the internals were poor and new exports pulled back from 50.9 to 50.5. The HSBC manufacturing read out today (which looks at smaller businesses) continued to show a worrying pace of contraction at 48.5, while the official services print expanded at a faster pace at 55.0.

Naturally traders were keen to watch USD/CNY (and CNH) today and calmer heads have prevailed here (at the time of writing), after what can only be described as a crazy Friday, with USD/CNY fairly flat on the day today. AUD/USD has found good buyers on dips below the 89 handle and I’ll be watching for a daily close below 0.8920. AUD/JPY is finding better selling.

We’ve also seen a raft of Australian economic release, with Q4 company operating profits growing a slightly below consensus 1.7%, while seasonally adjusted inventories fell 0.5%. These data points feed into Wednesdays Q4 GDP print, with economists expecting 2.5% annualised growth, so you may say there will be downside risks here. Glenn Stevens speaks on Friday and this could be an interesting forum for traders to get a firmer footing on the RBA’s view around the recent capex figures.

It was certainly a very busy open, not just on the ASX 200, but also the huge levels of volumes going through S&P e-minis. By early afternoon relative calm had settled in and some modest (and rather brave in my opinion) buying came into the ASX 200, Nikkei and even China markets, while US futures followed suit.

Europe expected to be sold off aggressively

Given US, FTSE and Eurostoxx futures are significantly lower from where the European cash session closed, we will see a fairly bleak open for Europe and a world of short-term pain for longs.

We’ve seen solid one-way selling from clients today, although there is no real panic like we have seen when geo-political issues have unfolded previously. In terms of drivers, it’s going to be a busy day with European, UK and US manufacturing in play. US core PCE (the Fed’s preferred inflation read) is also released and economists expect a slight tick lower to 1.1% from 1.2%. A number below 1% is not expected, but a zero handle on inflation would be psychologically very important and would send USD/JPY down towards the recently completed triangle pattern (on the daily chart) target of 100.43.

It promises to be a lively session and one thrown around predominantly by headlines.

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