US GDP and employment readings key ahead of the US open

Good morning,

• European indices edge lower as Russia is hit with more sanctions;

• European confidence readings unlikely to have much market impact;

• US GDP and employment readings key ahead of the US open;

• Another $10 billion taper expected from FOMC, statement eyed for rate hike clues.

European indices are expected to open marginally lower on Wednesday following choppy sessions in both the US and Asia, while a new round of sanctions announced by the US and Europe also weighed on risk appetite.

So far, the sanctions announced by the West have arguably not had the desired impact given that the Kremlin has continued to support the rebels in eastern Ukraine, even following the shooting down of flight MH17 a couple of weeks ago. That said, the Russian economy is clearly feeling the pain of the sanctions and the latest round could be enough to send the country into recession and cause unrest among some of Putin’s closest allies.

The sanctions are also likely to hit the economies of those dishing them out, particularly in Europe, but Germany has made it clear in recent days that this is a price worth paying in order to pressure Russia into helping bring this conflict to an end. Germany and Russia are large trading partners and exports from Germany have fallen since the first sanctions were announced leading to a slowdown in the economy and a drop in confidence among businesses. The only question now is which side will blink first, with both currently giving the impression that it has no intention of backing down on the issue. Russia has got away with a lot in the past but the shooting down of flight MH17 is seen by many as a game changer.

A certain amount of the weakness seen ahead of the open can also be attributed to traders sitting on the side lines ahead of some major economic releases and an the FOMC decision. It’s been a very slow start to the week and any data we have seen has had little to no impact on the markets but I am convinced that will not be the case today.

The data released during the first half of the European session may not do much to the markets, despite it containing some valuable information regarding confidence in different areas of the Eurozone economy. Aside from coming just before some major economic releases, these numbers are generally seen as lagging because they are released after other, more widely followed confidence readings, so in theory should already be priced in. That’s not to say they should be ignored because they provide important insight into sentiment in different areas of the economy and in general, if we see a big swing one way or another, they could get a reaction. That may be a little less likely today though given what’s to come.

The GDP and employment readings for the US will surely shake things up ahead of the FOMC decision this evening. The decision itself shouldn’t offer any surprises with asset purchases falling by another $10 billion to $25 billion, but the statement may provide insight into the outlook for interest rates with many expecting the Fed to adopt a slightly more hawkish tone in the coming months. With no press conference scheduled today, Chairwoman Janet Yellen may wait for the Jackson Hole symposium next month to provide more details on the path for interest rates and what exactly it will take to bring forward the first hike.