Russian sanctions and US response to ISIS

Yesterday Russia imposed sanctions on the EU and US around agricultural products, and overnight it has widened its reach to include Canada, Norway and Australia.

Russian ruble
Source: Bloomberg

This is an interesting development and illustrates that Russia is likely to go it alone in response to the developments in Ukraine. The sanctions are likely to impact countries like the Netherlands, Norway, Australia and Canada the most, as agricultural exports are among the top five exports of each of these countries, as Russia imports a majority of its milk and vegetable produce from overseas.

Looking domestically as to where the effect will be felt, the dairy and lamb exports trade are the most likely places to be effected by these sanctions; expect to hear government support if the financial strain impacts local farming communities.

The tit for tat reactions from both sides look unlikely to abate, with the eleventh hour approaching in the east of the country as further fighting was seen around Donetsk, with Ukrainian forces closing in on the rebels. A Russian ‘peace-keeping mission’ is not just a possibility now; the responses to the Western sanctions in the past 48 hours suggest it as a  ‘when’ the peace-keeping mission takes place. This continues to impact European markets and is seeing the correction in the DAX and MIB holding true.

What is also building in the energy markets is the possible responses that the US will take to the rise of ISIS in Iraq. There are reports this morning suggesting the US has hit two ISIS targets inside Iraq as the group begins to surround the Kurdish region in the north of the country; if the US was to re-enter Iraq, Brent crude could creep up to US$110 a barrel. Any signs that the US is going to have to support the Iraqi military and security forces against the rise of ISIS will fuel market suspicion of another US-lead offense in the country.  What would increase the risk is if Iran was to match across the border to defend Shiite sites. Upside risk in the oil price will build.

Ahead of the Australian open

We are calling the ASX 200 down 0.43% to 5485, as all market attention remains on firmly on risk. Today Australia will be watching the monetary policy statement being released from the RBA; there are three key parts to watch out for inside the report:

  1. The outlook for inflation, particularly how inflation will track over the remainder of the year given wage inflation is now a concern.
  2. Employment projections and where the rapid increase in the unemployment rate changes its outlook for the non-mining sector.
  3. Language around when rates will move. Glenn Stevens in his address in Hobart clearly stated that it will signal its intension around moving rates when its removes ‘period of stability’ from the policy decision statement. Further clarity will provide the market with more understanding of the RBA’s position

Also on the Asian scoop will be China’s trade balance; any further signs of stabilisation may slow the rate of declines in cyclical plays, while Japan will also see its monetary policy statement being released from the BoJ. Will its expectations of real wage growth post the current negotiations hold true?  If this isn’t the case and the recent inflation slide continues, will the BoJ be forced back into the market? If it is, this could be a Nikkei positive and yen negative.

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