Markets step back from Crimean crisis

Share Markets:

A DROP in US jobless claims figures in the US helped push equities higher overnight.  No fresh tensions in the Crimea region also gave share markets a breather from geopolitical risks. 

The Dow Jones closed 0.4% higher and the S&P 500 index ended the session up 0.1%.

Bonds:

US 10-year Treasury bond (futures implied) yields followed the ECB-inspired rise in European bond yields, rising from 2.70% to 2.75%. 

Australian 3-year government bond yields (implied by futures) slightly extended the earlier post retail sales reaction, from 2.98% to 2.99%.

The Australian 10-year yield appeared to be more influenced by the ECB, rising from 4.04% to 4.10%.

Currencies:

The US dollar index fell sharply following the European Central Bank (ECB) and hit a four-month low. 

The EUR/USD shot up after the ECB left rates unchanged from 1.3730 to 1.3873 following the ECB announcement and made a two-month high. 

Safe-haven yen underperformed the majors, USD/JPY rising from 102.60 to 103.17. 

Outperformer AUD/USD extended its earlier response to strong Australian data, rising from 0.9020 to 0.9113 - a three-month high. 

Couple the strong data locally and the EUR rise, the Aussie has rallied one US cent in 24 hours (two US cents this week). 

While this rally has been impressive, we are still inside the last month's range of 0.8900-0.9100.  We need to see a close above USD0.9100 to provide confidence that the move on the Aussie has further to go. 

The technical also support this view.

Commodities:

West Texas Intermediate crude oil rebounded after the biggest drop in two months after the US jobless claims data. 

Other commodities also generally rose overnight with the CRB index up.

Australia:

Retail spending rose by 1.2% in January, making it the strongest monthly growth rate in eleven months.  The annual rate of growth stepped up to 6.2% in the year to January, the strongest in four years. 

This annual growth rate is now well above the long-run average of 4.4%. 

This retailing outcome provides growing evidence that low interest rates and rising household wealth are giving consumers greater confidence to open their purse strings wider. 

The momentum in housing is also flowing on to retail trade.

Australia's trade position improved in January.

The surplus widened $842mn to $1.4bn, the largest surplus in nearly 2½ years. 

The trade balance has now been in surplus for three consecutive months.  Exports rose 3.7% in January while imports only rose by 0.8%.

The trade and retailing data adds to our view that the economy will gradually pick up over this year and that the Reserve Bank will start raising rates later in the year.

Europe:

The ECB did not alter its main financing rate or the deposit rate overnight. 

ECB's Draghi raised the Eurozone GDP forecast for 2014 to 1.2%, from 1.1% and kept the forecasts for 2015 and 2016 unchanged at 1.5% and 1.8%, respectively.

The ECB's inflation projections saw a lower revision for 2014 (1.0% vs 1.1%) and maintained those for 2015 (1.3%) and 2016 (1.5%).

Draghi's comments also sounded relatively relaxed with regard to the outlook and the situation on the credit front. 

The introductory statement stressed that the "information and analysis now available" fully confirm the ECB's decision to maintain an accommodative monetary policy stance "for as long as necessary". 

The forward guidance was confirmed and the easing bias remains in place, given the "overall subdued outlook for inflation extending into the medium term".

New Zealand:

House prices rose 9.3% in the year to February, according to Quotable Value NZ. 

While this was down on the 9.6% growth in the year to January, growth remains robust. 

United Kingdom:

The Bank of England (Boe) kept its key rate on hold at 0.5% and the asset purchase program was also maintained at £375bn.  There was no statement issued.

House prices accelerated in February to the fastest in almost five years as the economic recovery strengthened. 

House values increased by 2.4% in February and by 10% on a year ago.  A broadening economic recovery, government incentives and low interest rates are helping to boost UK's housing market.

United States:

The US Federal Reserve's Plosser, a known 'hawk' and voter on the FOMC, overnight said that the pace of tapering could leave the Fed behind the curve if the economy grows as it should and has been forecast. 

Plosser further added that the jobless rate could end up below 6% at the end of 2014.

The US Federal Reserve's Lockhart, a FOMC alternate voter, said overnight that weakness in Q1 data can be attributed to winter's wrath and that we should not expect to see an outstanding jobs report this Friday. 

Lockhart also said that tapering should continue unless a serious drop-off is seen in economic data.

Initial jobless claims fell by 26k to 323k in the week ending March 1, which is the lowest yet this year. 

But the BLS pointed out that the low claims corresponded to the states with most snow disruption, implying claims were simply not being recorded on time. 

If so, expect a catch-up claims bounce later in March.  Also on the labour market, corporate layoff announcements fell 24.4% in the year to February.

A downward revision to productivity saw unit labour costs revised from a fall of 0.5% in Q4 to a fall of only 0.1%.

Separately, factory goods orders fell by 0.7% in January, due to the previously reported 1.0% fall in durables and a lesser 0.4% fall in non-durables.


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