Global Market Overview

Last updated: July 21, 2014 9:09 pm

S&P pares drop but Ukraine worries linger

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Monday 21:00 BST. Concerns about the implications of last week’s events in Ukraine and Gaza remained at the top of the markets agenda, although Wall Street pared its initial losses and early buying of Treasury bonds faded.

“Geopolitics still dominate markets as the new week starts and the downing of [Malaysia Airlines’ flight] MH17 weighs on Russia’s relationship with the west,” said Kit Juckes at Société Générale.

After rallying strongly on Friday, the S&P 500 began the week with a loss of 0.2 per cent, although that still left the US equity benchmark within 12 points of the record highs it struck at the start of this month.

The CBOE Vix volatility index, Wall Street’s so-called “fear gauge”, was 5 per cent higher at 12.7 in late trade, well below its average so far in 2014.

Across the Atlantic, the pan-European FTSE Eurofirst 300 fell 0.5 per cent. Japanese markets were closed for a holiday.

Jim Reid, macro strategist at Deutsche Bank, said he had been surprised that markets had performed so well on Friday.

“Perhaps markets feel that either the stakes are so high that diplomacy is the only sensible outcome, or that Russia’s position has been weakened by the incident – thereby forcing [Russian President] Putin into less confrontational politics in Ukraine and the surrounding regions,” said Mr Reid.

“This is perhaps an understandable conclusion but the risk of a destabilising false step by a politician somewhere is not something that can be ruled out, so this story still has a long way to run.”

Mr Reid also suggested that optimism over US corporate earnings had offset geopolitical worries, given that about 68 per cent of S&P 500 groups that have reported have beaten earnings expectations, according to Reuters data.

The underlying factor behind the resilience in markets was viewed by most as being the ultra-accommodative policy stances adopted by the world’s central banks – although this prompted some concerns about complacency.

“As has been the case for some time, it is easy to conclude that the swath of cheap liquidity provided by central banks is providing a sense of security to investors,” said Jane Foley, senior currency analyst at Rabobank.

Albert Gallo, head of European macro credit research at RBS, warned that investors may be putting too much faith in central banks to rein in tensions and stabilise markets.

“There is a limit to what monetary policy can do, and in the US and UK the signs that continued easing is causing distortions in asset prices are rising, and the credibility of QE is coming under increasing pressure.

“Policy will eventually have to change direction from loose to ‘less loose’ – and the signal could come later this year or early next year. But if policy can no longer be eased – except in Europe – geopolitical risk will likely remain high going forward.”

Not surprisingly, Russian assets continued to bear the brunt of investors’ concerns.

“The increased likelihood of further international sanctions being imposed on Russia – on top of the sanctions imposed just last week – bear increasing downside risks to growth in Russia,” said Lee Hardman, currency analyst at Bank of Tokyo-Mitsubishi-UFJ.

The Micex stock index on Moscow fell another 2.7 per cent, leaving it nursing a loss of more than 6 per cent over the past three sessions.

The yield on government debt due to mature in 2027 rose 19 basis points to 9.23 per cent, the highest in more than two-months, while the rouble was slightly softer against the dollar.

The uncertain tone in global equity markets initially prompted a fresh bid for highly rated government bonds, although demand began to fade as the session wore on. The yield on the 10-year US Treasury was down just 1bp at 2.47 per cent, having earlier edged below 2.45 per cent. The German Bund yield slipped 1bp to 1.15 per cent.

Other “haven” assets were similarly lacklustre.

Gold was up just $1 to $1,311 an ounce, while the yen was 0.1 per cent lower against the dollar at $101.34 and only marginally firmer versus the euro.

In industrial commodities, oil prices gave a relatively muted response to worries about supply disruptions. Brent crude settled at $107.68 a barrel, up 44 cents, while copper rose 0.6 per cent in London to $7,025 a tonne.

Aluminium stood out among base metals as it gained 2 per cent to finish above $2,000 a tonne for the first time since February 2013. Zinc rose 1.9 per cent.

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