Japanese data points to a second month of weakness

• Russian troops in Ukraine spark yet further geo-political fears

• Japanese data points to a second month of weakness

• Eurozone inflation set to dominate the European session

A return to the geo-politically driven risk off sentiment overnight has seen a weak US session within which the S&P550 close below 2000, and this was carried forward through to a weak Asian session overnight. On this occasion it is Ukraine which is back on the agenda, with Russian nationals confirmed to be fighting within the military ranks, prompting a backlash in rhetoric from both Ukrainian and Western powers. To some extent this is expected to also impact the European indices negatively, however, with key figures such as Eurozone CPI and unemployment due to be released this morning, there are already plenty of market drivers to look out for today. As such, the European markets are looking to open somewhat mixed, with the FTSE100 -1, CAC +5 and DAX +20 points.

Yesterday’s announcement from pro-Russian rebel leader Alexander Zakharchenko that there are some 3-4,000 Russian nationals fighting against the Ukrainian army came as somewhat of a surprise. Not so much for it’s content, but more for how candid he is about something which I am sure Mr Putin would have liked to keep quiet. It has not taken long for this to escalate and the subsequent announcement from Ukraine that they have been invaded by Russia is likely to sever any chance of a diplomatic solution for the time being. That being said, any diplomatic resolution to this crisis always seemed somewhat unlikely given that much of this situation seems to have been manufactured by the Kremlin and as such Putin is most probably happy at how everything is going. The latest revelations have brought about increased pressure upon Obama to address the situation once more, yet his decision to rule out a military intervention are highly unsurprising, especially when he is beginning to move towards increased engagement with ISIS in Iraq and Syria (despite what he says). Thus it is back to that trust sanctions list where both Obama and Merkel have agreed something needs to be done for this latest misdemeanour. However, with the Eurozone struggling to grow and the expectations that Russian sanctions will push GDP deep into negative growth in Q3, I cannot see how Merkel would be too enamoured by the prospect. We may find out the answer to whether such steps will be taken over the weekend, when a meeting of European leaders takes place on Saturday in the familiar surroundings of Brussels. The big question is whether this meeting is going to lay the groundwork for yet further economic sanctions which would almost certainly not be welcomed by the markets.

Overnight, the focus has really been upon Japan, with a veritable feast of economic indicators providing yet another glimpse of the economy at a time where markets want to know if there is enough juice in the system for the BoJ to reach their targets, along with the question of whether the sales tax continues to drag the economy down following it’s introduction in April. From the standpoint of Shinzo Abe, this release was not particularly what he would have been hoping for, with both inflation and unemployment both disappointing which leads us to the question of whether an increase in the rate of asset purchases is necessary later this year. Inflation being the key target, fell back from 3.6% to 3.4% which when removing the effects of the sales tax means that it stands at 1.3%; some 0.7% short of the 2% target. This represents the second consecutive fall in CPI and thus the question has to be asked as to what needs to be done to push it higher once more. From an employment standpoint, we saw further weakness with the unemployment rate rising from 3.7% to 3.8%, which again follows a rise in the June figure too. The one encouraging figure of note came in the form of the retail sales number, which saw its first year on year growth since the introduction of the sales tax back in April. At 0.5%, this figure essentially represents the light at the end of the tunnel and thus the government will now gain some confidence that the impact upon the economy of such a move would generally take hold for around three months. With another discussion provisionally pencilled in for December as to whether there should be another tax rate hike, today’s figure is going to be key in such a discussion.

Finally, looking ahead the European markets are braced for a particularly noteworthy morning of inflation and unemployment data. The unemployment picture is somewhat of the lesser figures on this occasion, where markets have almost come to expect weakness especially given the impact that Russian sanctions are going to have upon business going forward. However, it is the CPI figure which is most interesting, as Mario Draghi hopes that we will finally see some sort of impact from the measures introduced earlier this year. So far, there have been little positive impact upon inflation, with last month’s figure falling back to 0.4%. However, with market estimates looking for a figure of 0.3%, things could be about to get even worse. Last week’s Jackson Hole speech from Draghi portrayed a more dovish ECB who would be willing to act in a decisive manner should there be the need. Well another fall today could be yet another straw on that camel’s back; perhaps not enough to break it but certainly an additional strain. The ECB are set to reconvene again next week and thus there is a quick turnaround between today’s CPI release and a reaction from the ECB. Perhaps it would not be enough to force the introduction of asset purchases, however it could also be enough to generate a more open and willing response with regards to whether the ECB are actively seeing it as a likely option.