ECB monetary policy decision likely to dominate European session

• Russian retaliatory sanctions fail to cause much of a stir

• Threat of Russian invasion into Ukraine causes market jitters

• Australian unemployment spikes higher

• ECB monetary policy decision likely to dominate European session

European markets are largely flat following yet another disappointing Asian session which saw losses across the board in response to an ongoing Russian threat in Ukraine. The imposition of sanctions from Russia yesterday appears to have had little effect to local markets, with traders seemingly focused more so on Mario Draghi and ECB who are due to speak later today. Subsequently, European markets are expected to open fairly flat, with the FTSE100 +2, CAC -5 and Germany -11 points.

Global sanctions against Russia have been gradually increasing since the annexation of Crimea and later the downing of MH17 via weaponry that has been claimed to have been provided by the Russian military. However, up until now Russia has chosen to remain patient and thus yesterday’s announcement of Russian limits to imports has come later than many expected. Putin’s promise that any actions in response to sanctions would be geared on ensure Russian consumers are not ill-effected could not be any more wide of the mark, with restrictions on imports of US and EU goods likely to limit supply and drive up inflation. The impact upon producers at home will also be felt, given that Moscow is both the biggest buyer of European fruit and vegetables.

Alongside the war of economic sanctions, there is also the potential for a military war and that is what the markets have been afraid of over the past few days. The 20,000 battle ready Russian military personnel that have amassed at the Ukrainian border is at best a threat but at worst the pretext to a military campaign that many believe will take place under the context of a ‘humanitarian mission’. The past two months have seen Ukrainian government forces taking back swathes of rebel held territory and as such there is clearly a feeling that those rebels that have been fighting using Russian military equipment and intelligence could actually need full boots on the ground to gain back the advantage. Whether this occurs or not is difficult to call and as such there is a certain edginess in the markets rather than a fully blown crisis mode. However, with Russian media having portrayed the ‘plucky rebels’ as Russian ‘comrades in need of humanitarian help, there is likely to be a growing clamour for Putin to send troops in to gain back those areas that have been lost to Ukrainian military in ‘New Russia’. Unfortunately ‘New Russia’ is in fact Southern and Eastern Ukraine and as such any military intervention could mean another land grab any even greater ratcheting of tensions in what is one of the biggest breakdowns in Russian/Western relations since the Cold War.

Elsewhere in the markets, Australian hopes of a swift and clean transition from an export led economy to one reliant upon domestic consumption have been dashed, with unemployment rising to its highest level since 2002. The rise to 6.4% shocked the markets, with many expecting the previous rate of 6% to remain steady. However, today is unfortunately a continuation of an upward trending unemployment rate that has been rising since mid-2011 when it bottomed out at 4.9%. This is in stark contrast to most of the other major economies which have seen their employment levels rise as we progress out of the 2008 financial crisis. However, it is clearly a stark remind of the impact weakness in China and major export markets have had upon Australian jobs especially when coupled with depressed commodity prices. The impact to the markets have been stark, sending the Australian dollar lower across the board, yet the impact to monetary policy I believe will be very little in the immediate future. Glenn Stevens insisted that there will be a period of calm where rates are neither raised or cut and today’s announcement will likely simply lengthen this timeline rather than push them into moving towards any further cuts.

Looking ahead to the European session, the focus is going to be upon central bank policies with both the BoE and ECB announcing their most recent monetary policy. From a policy standpoint, I believe both events will somewhat of a non-event. However, it is the ECB meeting that has the potential to really move the market, with many looking to the subsequent Q&A session from Marion Draghi for potential clues to future actions. The ongoing deterioration of Eurozone inflation means that for now we remain in a place where asset purchases cannot be ruled out and for this reason, there is still the possibility that Draghi could drop a bombshell on the markets by hinting as to its potential use. In all likeliness he will seek to let his most recent range of policy measures kick in, yet any inclination or hint that QE could be around the corner is likely to be greeted by substantial volatility in the markets.