Markets haven't reacted to Ukraine tensions

The weekend news flow has been fairly light and although tensions in the Ukraine are still increasing, there hasn’t been too much of a reaction today.

The Japanese market is seeing reasonable losses, although there are still earnings due on the close from Panasonic (among others). Part of the move, as always, is on the back of JPY strength, which in part can be attributed to concern around Ukraine. However, today’s Japan March retail sales report (which grew a better-than-expected 11% on the year) would have contributed, as further near-term stimulus trades are unwound.

Most would have looked past the strong March retail report as they were a pure reflection of consumers buying ahead of the April sales tax hike, so this won’t alter the perception of central bank policy change and certainly no-one is expecting anything but economic forecast changes in this week’s BoJ meeting.

It’s interesting to see a number of negative articles and research reports around the Japanese economy doing the rounds after recent Japanese data. Most global strategists would still put China as far and away the biggest macro concern, however I still feel Japan is the region to watch over the next couple of years judging by Friday’s Tokyo inflation numbers, which, if adjusted for the impact of the sales tax, didn’t actually increase from the March print of 1%. Of course you can throw in the record March trade deficit and the TANKAN outlook, but more needs to be done and most feel the current optimistic, vaguely-hawkish bias of the BoJ will change some time soon.

China is also getting sold off fairly aggressively despite a slightly lower RMB fix, with a reasonable rise in the interbank rates. There’s a fairly healthy earnings flow out of China and Chinese banks listed in Hong Kong and from what have seen so far from a number of the major lenders, net interest margins and earnings growth look strong and the 4.5x forward multiples a number of the banks trade on appear very cheap. Still, the overall benchmarks are falling, with more talk of IPO concerns.

We are starting to see cracks in the iron ore price again, with Dalian iron futures falling over 3%, although it was down more in early trade. Weakness was also seen in rebar futures and when we see inventories at Chinese ports increasing 1.4% last week to a new all-time high of 109.55 million tonnes, the spot price could struggle. After finding some support through April, the spot price has now corrected 7% to $111.00 from the recent high of $119.4. Once again the AUD has cared little about this input.

The ASX 200 still trending higher

The ASX 200 is the regional outperformer today and while the market was closed on Friday for the ANZAC holiday, the bulls will take a flat day, especially given the poor price action across the rest of the region. Utilities and financials have put in the points, with the financial sub-sector looking like a thing of beauty from a trend perspective. As long as the market continues to support this sector and pullbacks remain as shallow as they have been, the broader market should continue finding support.

So there has been some modest volatility in Asian equities, but ranges in the forex market have been fairly limited, however I suspect that could change this week. There is so much to wade through globally, be it central bank meetings (FOMC and BoJ), tier one data (US payrolls, US ISM, core PCE, Eurozone CPI estimate, China manufacturing ISM to name a few), earnings from companies globally and one-off events, such as finer details around the European bank stress tests (tomorrow) and the ECB’s quarterly lending survey (Wednesday). Still, the market firstly needs to work out which data points have the ability to actually change the investment landscape and create a new underlying trend. Or on the flip side, whether any misses simply creates more short-term moves and thus trading opportunity.

Euro CPI estimate the key release this week

The Euro CPI estimate seems to have the broadest implications on a sizeable miss given the ECB could really ramp up its inflation fighting (and EUR) rhetoric. Consensus is we see a 30 basis point bounce to 0.8%, although this is the sort of data point where you rarely get a big miss, but certainly anything less than 0.6% should see EUR weakness and a test of the July uptrend at 1.3760 should be on the cards.

US futures haven’t really moved today and clients haven’t been overly active in our out-of-hours markets. Rarely do we see traders selling these markets on a pullback in China and despite how interconnected markets are these days, JPY strength has no direct bearing on European/UK company earnings.

In terms of drivers, any further escalation in the Ukraine situation will no doubt be the highlight, with economic data fairly light on the ground. It’s hard to think US pending home sales will have a material impact on sentiment given what’s ahead this week. Earnings centre on Deutsche Bourse, Bayer AG and GDF, however on a corporate level further developments in the Pfizer/AstraZeneca tie-up will get the lion’s share of the headlines, given the sheer size of a merge entity.

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