North American Wrap-up: The Ukraine Fade

The Ukraine Fade

North American markets started out on the right foot today, but were quickly swept off it due to escalating tensions in eastern Ukraine.  While markets have been largely ignoring the situation in Russia’s former province since Crimea was annexed, the actions of today refused to be ignored.  For those who missed it, Ukrainian military forces ousted Russian supporters from government buildings and airports conspicuously close to the border with their larger neighbor, but not without some firefights and reported fatalities.  The scary look and feel of the whole operation made many traders wary that they were witnessing the beginnings of WWIII via YouTube videos and live Tweets.  Therefore, the initial surge in equities propagated by a spillover from yesterday’s rally stalled and fell over 200 points from the Dow’s high to low over a three hour span.

Once scary updates started to wane and nightfall brought calm to Ukraine, something strange began to happen; it’s almost as if the market completely ignored the situation all over again.  By the end of trade, US equities all closed in positive territory and essentially made up everything it had lost on the Ukraine fade.  Granted, most of that rally was likely helped along by an announcement from Japan that they were going to downgrade their own economic assessment (more on that in a moment), but it’s almost as if hostilities ceased to be an issue any longer.

I’ve written a few times that this whole Ukraine snafu isn’t going anywhere anytime soon, and I remain entrenched in that camp, but it was fascinating to see how ADD the market has become in switching from one headline to the next and completely changing the course of major markets.  The advancement of the military by Ukraine today is an important escalation that may not continue to be tolerated by Russia.  Russian President Vladimir Putin has warned very recently that Russian speaking citizens in Ukraine and their provinces have the right to potentially secede from the state and follow the path of Crimea; and if violence is administered on these “free people” Russia may have to respond.

For obvious reasons, most rational thinking people are hoping that Russia doesn’t get involved militarily as that would likely lead to responses from other world leaders including Europe and the United States which could then get REALLY scary.  Unfortunately, Putin already has parliamentary approval to send troops in to Ukraine if he deems it necessary to protect the rights of Russian-speaking citizens or those of Russian heritage, a very large portion of whom are in eastern Ukraine; and he seems just crazy enough to do it.

Now that we have seen an escalation of sorts, markets may not pay attention again until the next escalation takes place.  While no one is exactly sure when or if that will happen, it may be wise to keep a close eye on Twitter as that seems to be the fastest distribution of real time data in the area.

Japanese Fail…Sort Of

Japan has been a hot topic for financial commentators for a while now, particularly since Shinzo Abe took over as Prime Minister in December 2012.  His plan to dig his nation out of the nearly two decade long deflationary trap became known as Abenomics, and by and large, has been moving in the right direction since he took over.  Part of the Abenomics plan to increase inflation has been to provide unprecedented monetary stimulus via the Bank of Japan and even increase the amount of stimulus if it was deemed necessary.  Well, today brought us a headline that put many investors in the camp that the time for more stimuli would be coming sooner rather than later.

The headline, that the Japanese cabinet office would be downgrading its economic assessment in its April report came a little sooner than many expected.  Many investors felt that any conciliation from Japanese authorities would be coming after they got back some solid data following the April sales tax increase and its deleterious effects.  By prematurely adjusting expectations so quickly they surreptitiously increased the probability that the BoJ would adjust their monetary stimulus a little earlier than expected as well.

While the cabinet is not directly linked to the BoJ, it is widely believed that Abe’s influence at the banking institution is strong, and if his cabinet is willing to jump a little early, the BoJ could be waiting with fists full of Quantitative Easing as well.  As news of the Japanese adjustments filtered through markets, JPY crosses rallied across the board and helped to buoy equity markets right along with them.

Looking Forward                                                                       

Tonight should be an interesting evening for markets as one of the most vital releases of the week will be revealed in Chinese GDP.  China has undoubtedly been a gigantic success story as it has grown from a destitute and developing nation to the second largest economy in the world; and much of that growth is spelled out in its GDP.  Expectations are for China to grow another 7.4% from last year which is less than the previous quarter (7.7%) and hasn’t been that low since October 2012.  Therefore, you could say that the bar is set rather low due to some perceived struggles in their corporate and real estate sectors.

If Chinese GDP fails to achieve the depressed target, a broader selloff in the AUD and NZD may take place, with special attention to the AUD which has broken some important levels of support against a variety of currencies.