Canadian inflation and retail sales eyed later

Good morning,

• UK borrowing seen rising to £8.55 billion in February;

• Canadian inflation and retail sales eyed later;

• US steps up sanctions as the Duma approves Crimean treaty;

• Risk aversion likely ahead of nervy weekend.

The final European session of the week is shaping up to be a fairly quiet one, which is being reflected in the futures ahead of the open this morning. As it stands, the FTSE is expected to open down 6 points, the CAC up 11 points and the DAX up 13 points.

One reason for this is the lack of economic data or events scheduled for the final day of the week. The European session is going to be dominated by a few low tier economic releases, such as eurozone current account data and Italian industrial orders and sales. The impact of these of the markets tends to be minimal at best and as a result, traders have a tendency to ignore the releases altogether.

The UK public sector net borrowing figure may have some impact on the British pound, as it will give us some indication of how much the country will borrow this year and whether the Chancellor will meet his target. Should the UK borrow more than its target, then George Osborne would be forced make up that failure with additional austerity that could hurt growth. The flip side of that though is that if the UK borrows less than initially thought, it could either clear the deficit ahead of schedule, or use the additional capacity to fund growth friendly schemes.

Things are unlikely to pick up much after the opening bell on Wall Street. The economic calendar is looking equally thin then as well, with the only notable data here coming from Canada and the eurozone. Shortly before the US open we’ll get Canadian inflation and retail sales figures. The official CPI reading is seen falling to 0.9%, year on year, in February, from 1.5% the month before, while retail sales are expected to bounce back in impressive fashion from December’s 1.8% decline to rise 0.7%.

One thing we may see today from traders is a little more caution and even risk aversion as we near the end of the week. Things are beginning to heat up again between Russia and the West, following Russia’s annexation of Crimea. Russia’s lower house of Parliament – the Duma – has already approved the move, which the West has deemed illegal, and the upper house is expected to do the same today.

The US and the EU imposed sanctions on a number of Russian and Ukrainian officials linked to the takeover of Crimea, earlier this week, in a move deemed by the markets as weak. This was seen as a positive thing at the time as it reduced the potential for escalation, but it appears that was just a short term view. Russia has since responded with sanctions of its own on nine US officials including House Speaker John Bohner and Senate Majority Leader Harry Reid. Russia has made it clear that any action from the US and the EU will get an equal reaction, in this case this was Russia responding to the initial weak efforts of the US with similarly weak sanctions of its own.

However, US President Barack Obama has already signed an order to impose further sanctions on Russia, the victims of which will be Bank Rossiya and 20 people linked to the annexation of Crimea. This is now likely to get another response from the Kremlin, potentially over the weekend which is what may make traders a little edgy as we approach the end of the trading week. While I don’t expect the situation to escalate much over the weekend, we’ve seen it time and time again that things take a turn for the worse and investors panic prompting markets to open lower next week. Traders will have to decide today whether it’s worth taking the risk, or parking their money somewhere safer, like in Gold, US Treasuries or the yen, as we’ve seen in the past.

The situation here is not getting any better and if anything, the war of words is getting a little more fiery. German Chancellor Angela Merkel yesterday claimed that right now, the G8 no longer exists, in other words Russia is no longer considered a member. Meanwhile, Russian Foreign Minister Sergei Lavrov warned US Secretary of State that the reunification of Crimea with Russia is not up for review and should be respected. Under the circumstances, neither side looks like backing down which means this is unlikely to go away any time soon.

One thing that may be a concern to traders is suggestions by Ukraine’s ambassador to the UN that there are indications that Russia is preparing a military intervention in south and east Ukraine. Russia has denied that this is the case, but if it turns out to be true, this is certainly the kind of event that could really impact markets at the open next week.