Markets risk-off as geopolitical risk ramps up

US equities unwound on the back of some mostly positive economic releases, as geopolitical risk came back into play. 


The conference board’s consumer confidence and new home sales both came in well ahead of estimates, but this wasn’t enough to lift sentiment. Fed members were also quite vocal with Dudley saying a mid-2015 rate hike seemed reasonable, while Plosser suggested the Fed is closer to meeting its twin objectives. Risk assets lost some ground, while the yen and gold were bid higher in a flight to safety.

Markets focused on Vladimir Putin proposing to withdraw a mandate to use military forces in Ukraine. While this was a positive and resulted in some stability in European trade, further reports that Syrian warplanes attacked targets in western Iraq sent risk assets into a spin again. Additionally pro-Russian militants remained active in Ukraine despite reports Putin called a ceasefire.

Cable retreats on Carney comments

Perhaps the most significant move in the FX space was GBP/USD dropping back below 1.7000 on the back of Mark Carney comments, reinforcing there is scope to absorb more slack before a rate increase. Additionally, while prices are rising, it seems wage growth is limited and this means any rate hikes are likely to be gradual and limited.

While the pair has pulled back, there is still a fairly solid uptrend in place which will give traders the opportunity to buy the pair on dips. This uptrend line comes in at around 1.6900 and has been in place since July 2013.

Yen interest to weigh on Nikkei

Japan has been an interesting one this week and impressed yesterday after a strong recovery from early weakness. Officials in Japan have been quite vocal about swiftly implementing some growth strategies to keep the economic recovery on track. The pension fund and proceeds from the sale of government bonds have been the topic of discussion all week. No doubt we’ll hear more this week, but there is plenty of talk that these funds will be used to invest in Japanese stocks. USD/JPY was quite choppy in US trade after initially rallying to 102.17 before a swift retreat to 101.94 as the yen strengthened. This will put some pressure on the Nikkei at the open today with our current call pointing down 0.4% to 15,320.

Materials to come under pressure

Ahead of the local market open we are calling the ASX 200 down 0.5% at 5404. It’s not looking good for risk at the moment, particularly following a bit of an unwind in the commodities space. Iron ore pulled back, falling for the first time in five days, while gold managed to rise to April highs. This should see the precious metals name recover some ground today, while iron ore stocks are likely to continue struggling.

Defensive plays are likely to be in favour today on the back of the risk-off tone, particularly in the healthcare space. A minor positive for some equities will be the pullback in the AUD. AUD/USD dropped back below 0.9400 after having held its ground for a while and could get some direction from RBA Deputy Governor Lowe’s comments later today.

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