Europe focuses on CPI and geopolitical risk

Sentiment has somewhat stabilised in Asia as the impact of rising geopolitical risk subsiding through trade. US futures have also ticked higher, with S&P futures back at that 2,000 level.

Source: Bloomberg

While the primary driver of losses in global equities were developments on the Ukraine-Russia front, there were growing signs that the recent rally in equities was beginning to stall.

Perhaps yesterday’s news gave investors an excuse to take some profits off the table after a good run in equities. Given leaders have already been quite vocal about imposing sanctions on Russia, and even deepening them if the situation persists, it’s becoming clearer that this will not stop Russia’s pursuit.

If the US and other European leaders impose further penalties, Russia will bite back with sanctions of its own. As winter approaches in Europe, the main threat will be energy supplies and a potential spike in prices.

This threatens to disrupt the recovery that has been building momentum this week, particularly in Europe. With a week to go to the ECB meeting, the question now is whether investors still be confident in buying the dips.

Japan data a concern

The Nikkei has been an underperformer in Asian trade today as the yen’s safe haven appeal kept USD/JPY under pressure. There were a raft of releases out today, which generally showed the economy there in a vulnerable state. Household spending is down a whopping 5.9%, while the jobless rate is up to 3.8%.

Both these figures were below expectations, but the inflation reads were broadly in line with consensus. This is mainly due to the effect of the sales tax hike, leaving investors to wonder what will happen when its effects wear off. Industrial production missed expectations but showed an improvement from the previous reading.

All up, these readings showed just how fragile the economic recovery is, and will only put pressure on the BoJ to take action in order to keep the recovery going. That said, bar any further escalation in geopolitical risk, there is a good chance we’ll see investors buy dips in USD/JPY on speculation the BoJ might have to do more.

Reporting season comes to an end

It has been an uneventful day for the ASX 200, with the market completing earnings season on a mixed note. The big results today were Woolworths (WOW) and Virgin Australia Holdings. WOW lost ground after reporting results that were broadly in line with estimates and failed to inspire.

All the headline figures matched expectations, apart from a slight miss in the dividend of 72 cents (versus 73 cents expected). Growth in food and liquor businesses continues to make up for the challenges faced by Big W and Masters. WOW had already flagged its struggling home improvement business.

However, the company’s FY forecast of 4-7% growth was in line was with estimates. Results from Transfield, Virgin Australia and Harvey Norman were positively received by the market. A lot of the companies reporting today sounded caution on outlook – hardly a surprise considering some of the challenges the domestic economy is facing. As expected, the materials plays lagged and the free fall in iron ore prices will remain a talking point heading into next week’s trade.

More sanctions on the cards

Ahead of the European open, we are calling the major bourses slightly higher. Investors will be keeping a close eye on peripheral bond yields after yesterday’s developments resulted in a rise in yields.

We’ve already heard from US President Barack Obama as he ruled out military action on Russia and I’m sure other European leaders will also be vocal about the situation. German CPI was in line with estimates yesterday and focus will now shift to the first estimate of the region’s August CPI.

Mario Draghi made it clear that demand is low and went as far as saying financial markets have indicated that inflation expectations exhibited significant declines across all horizons over the month of August. Should this level of discomfort continue, markets will feel action has to be taken. As a result, this reading will carry some weight. Any further weakness on that front is likely to see the single currency come under pressure.

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