Gold and energy commodities are up today. So are safe haven currencies such as the yen.
The Russian ruble is down. So is the euro and emerging market currencies and markets are taking a licking.
Pretty much what you’d expect when the crisis in the Ukraine has escalated to include a threat of armed conflict between Russian and Ukrainian soldiers
The biggest move has been in the share prices of energy companies that might benefit if natural gas prices soar due to a cut-off in gas exports from Russia across the Ukraine and into Western Europe.
For example, shares of Norwegian oil and gas producer Statoil (STO) are up 2.35% today as of 2 p.m. New York time.
Shares of energy companies without any near-term way to take advantage of any stoppage were off with Chesapeake Energy (CHK) down 1.2% and France’s Total (TOT) off 2.31%.
The oil benchmark price of the West Texas Intermediate climbed 1.77%. The Brent benchmark rose 1.6%.
Most of the moves I’m seeing today aren’t specific to the crisis but are instead the standard response of traders to heightened risk. For example, the safe haven yen rose to 101.4 to the U.S. dollar. The euro is off 0.43% against the dollar. Gold is up 2.15%. The iShares MSCI Emerging Markets ETF (EEM) is down 1.89%.
The ruble is the big crisis specific loser, down 1.4% today against a basket of currencies—despite an increase in benchmark interest rates from the Russian central bank. That continues the Russian currency’s slide in 2014. The ruble is now down more than 10% for 2014
The slow response of U.S. and EuroZone diplomats to the crisis with lots of talking and not much action (not necessarily a bad thing if the alternative is shoot first and talk later) suggests that this crisis will drag on for a while. An “emergency” meeting of EuroZone leaders isn’t scheduled to take place until Thursday, March 6.
It sure looks like the People’s Bank is tightening again.
China’s yuan was down 0.4% against the dollar at one point yesterday. That brought the currency’s decline to almost 1% since Wednesday, February 19. For most currencies a 1% drop in a week isn’t a huge deal. Just normal volatility, the markets would say. But this is the yuan, the very tightly managed yuan. China’s currency doesn’t move up or down unless the country’s central bank decides to let it move. So the move has set off loud alarm bells: Are we looking at a new policy move by the People’s Bank of China designed to 1) limit speculation in the currency, 2) pave the way for a wider trading band than the current daily maximum of 1%, and 3) reduce upward pressure on China’s money supply.
It’s the last that is making the markets the most nervous. Add a decision (if that’s what it is) to let the yuan fall together with figures from the People’s Bank showing it drained 100 billion yuan ($16.3 billion) from the financial system in the past week and you’re got solid evidence that the central bank has decided to tighten–again.
And that might be evidence that the People’s Congress, meeting next week, will announce a growth target for 2014 lower than the 7.5% target for 2013. Thinking here is that a lower growth target would give the central bank more room to tighten monetary policy.
All this is just starting to ripple out through Chinese financial markets—if only because any conclusion that we’re witnessing a shift toward tightening of the sort that knocked China’s equity markets into a bear in 2013 is so tentative. Read more
Today, January 29, big, surprise interest rate increases from central banks in Turkey, India and South Africa didn’t stabilize global markets. A decision on Wednesday by the Federal Reserve’s Open Market Committee to reduce its monthly buying of Treasuries and mortgage back securities by another $10 billion a month added to the downward bias. The U.S. Standard & Poor’s 500 fell 1.01%. The German DAX slipped 0.57%. Among emerging markets the Turkish stock market dropped by 2.29% and stocks retreated 0.59% in Brazil. In Asia Japan’s Nikkei 225 was down 3.33% as of 10.40 p.m. New York time.
If the Turkish central bank thought a huge interest rate increase would shock and awe investors, it was disappointed. After avoiding an actual interest rate increase in the face of pressure from the government, Turkey’s central bank used an emergency meeting to raise its benchmark seven-day repo rate to 10% from 4.5%. The move is intended to 1) restore confidence in the central bank, 2) stop a run on the Turkish lira, and 3) reduce an inflation rate running at 7% and threatening to move higher. The lira was down 30% against the U.S dollar in the current rout and it now trades at a record low against the U.S. dollar.
The Reserve Bank of India also raised interest rates yesterday with an increase in the benchmark rate to 8% from 7.75%. Inflation in India has been running near 10% and the country’s reliance on cash flows from overseas to balance its current account deficit has kept pressure on the rupee.
South Africa joined the interest rate parade yesterday with the South Africa Reserve Bank hiking its benchmark repurchase rate to 5.5% from 5%. The increase was the first for the bank since 2008. Inflation in South Africa climbed to 5.4% in December. The rand is down 6.8% so far in 2014.
The problem with interest rate increases like these is that they’ll only work to stabilize financial markets and currencies if 1) investors and traders think the most recent move is the last or near the last in a series of interest rate increases, and 2) if investors and traders find the rates on offer compelling enough to turn cash outflows (into dollars) into cash inflows (into lira, rupee, and rand.) Read more
What looks likely to drive the financial markets once Santa is back at the North Pole and his rally has passed into the record books?
Here’s what I think deserves watching as we turn the corner into January.
- Yields on the 10-year Treasury are pushing 3%. In fact yields pushed briefly to 3.01% today—the highest level since July 2011. Nothing magical about 3% versus, say, 2.96% but 3% clearly has the market’s attention and this level is a benchmark that investors and traders are watching to gage the reaction to the December 18 Federal Reserve decision to begin tapering its $85 billion in monthly purchases of Treasuries and mortgage-backed securities. 3% isn’t enough to stall a rally, but it is likely to make the cautious more cautious.
- The Japanese yen closed at 105.14 to the dollar today and it looks like the next test will come when the currency falls to 107 to the dollar. Read more
The yen is taking a bit of a breather today after hitting a six-month low against the U.S. dollar yesterday. Today’s slight rise in the yen—0.57%–takes the yen to 102.37 to the dollar. Japan’s currency is down 14% for 2013 against the U.S. dollar.
And since Tokyo stocks climb as the yen falls—on expectations that a cheap yen will create more sales overseas for Japanese companies and add to revenue and earnings as strong currencies are converted into yen for hometown balance sheets—Japanese stocks moved up to just short of a six year high for the Nikkei 225 Stock Index at a December 3 close of 15,749.70. That’s the highest level for the index since December 12, 2007.
The pause for the yen—and most likely for Japanese stocks too—comes as investors and traders wait to see what the European Central Bank will do on rates at its Thursday, December 5 meeting. The central bank is most likely to stand pat rather than cut interest rates at the meeting.
Investors and traders are also waiting on U.S. jobs data due on Friday, December 6. In October the U.S. economy added 204,000 jobs and a number significantly above that report would add to fears that the Federal Reserve will move to begin tapering off its $85 billion a month in asset purchases with its December 18 meeting. Economists surveyed by Bloomberg are projecting that the U.S. economy added 181,000 jobs in November.
Right now it looks like investors and traders in Japan—and in Europe and the United States—are in a wait and see/protect the profits mode in front of the Thursday and Friday news.