Risk appetite takes a hit on new sanctions against Russia

Good morning,

• Risk appetite takes a hit on new sanctions against Russia;

• Negative impacts likely to be temporary, could reverse today;

• Housing, jobs and manufacturing in focus for the US.

Risk aversion has returned to the markets on Thursday after the US and Europe announced a fresh round of sanctions against Russia in response to its part in the Ukrainian conflict. European indices are trading lower across the board and we’re expecting to see a similar response after the opening bell on Wall Street, with the S&P seen 7 points lower, the Dow 38 points lower and the Nasdaq 14 points lower.

The Ukrainian crisis hasn’t been a big focus for the markets recently, with it having fallen out of the headlines and the risk associated to it having been priced in. However, additional sanctions such as those imposed by the US and those expected by Europe at the end of July, have the potential to escalate the crisis further, not to mention damage the economies of those involved in the sanctions. Germany is the prime example of this given the amount of trade it conducts with Russia.

The pull back in the markets is only likely to be temporary though, given the size of the sell-off that we’ve seen in response to the sanctions. This is hardly a major development, it’s simply a case of a tad more risk being priced in. In fact, we could see these losses reversed as early as today, with plenty of data being released from the US this afternoon.

While Yellen’s testimony over the last couple of days was viewed as slightly hawkish, I don’t believe there was enough in it to prompt the kind of sell on good news scenario that we’ve seen at times in recent years. Yellen highlighted housing as one area that has not really performed well this year so at this stage, a boost in building permit and housing starts would be welcomed, not feared.

The jobless claims numbers have been persistently strong and the same is expected today, with 310,000 new claims expected for last week. Continuing claims are also expected to drop slightly, to 2.575 million, close to the near 6 year lows that it hit recently. We also have the Philly Fed manufacturing index being released today so there’s plenty of data for traders to get their teeth stuck into that could provide that boost to move indices back into positive territory.

We also shouldn’t overlook corporate earnings season in all of this. Earnings season doesn’t just impact the stocks and sectors involved, it has an impact on sentiment as a whole so the performance during the season should be monitored to determine risk appetite.