BoJ governor Kuroda indicates an increasingly hawkish stance

• Malaysian airlines crash sparks geopolitical fears

• Israeli ground offensive in Gaza heightens sell-off

• BoJ governor Kuroda indicates an increasingly hawkish stance

• Jens Weidmann speech to dominate as Eurozone and Germany fears persist

What was supposed to be a day where financial markets unwound following a week of high volatility economic announcements has in fact seen markets become embroiled in multiple geopolitical stories. The downing of Malaysian Airlines flight MH17 has been accompanied by a ground assault operation throughout Gaza by the Israeli armed forces, sending investors running for the nearest safe haven. Within European markets, the brunt of this was felt yesterday, yet we continue to see a risk off sentiment dominating markets in the futures markets. European indices are expected to open lower, with the FTSE100 -28, CAC -30 and DAX -60 points.

Yesterday’s crash involving a Malaysian airlines plane over Ukrainian airspace saw all 295 people on board killed in what seems to be a further escalation of the separatist conflict within the country. The blame appears to lay at the door of the pro-Russian rebels whom having recently been equipped with high-tech Russian weaponry, have been shooting planes out the sky for fun. This time they got it wrong, downing a commercial airline, causing not only a humanitarian catastrophe, but also a geopolitical nightmare. As is generally the case with any major geopolitical threat, the markets headed for the nearest perceived safe haven, seeing gold, oil and the VIX all spike higher. Conversely, any perceived riskier assets saw a sharp retreat, with the S&P 500 and Dow seeing their biggest one-day fall since April 10 and May 15 respectively. Ultimately, this issue is a clear firelight to what is already a tinderbox in Ukraine, with the Ukrainian leader now justified to go into those rebel held regions with much more vigour despite Putin’s accusation that the military push from the government was at fault for this crash. Backed by the western world, I fully expect to see further pressure on pro-Russian rebels as Ukraine seeks to take back it’s sovereign land once more. Given the likely ongoing emergence of negative pressure surrounding the Russian’s decision to arm these rebels with such weaponry, it will be interesting to see if Putin steps back from his involvement somewhat, thus leaving the rebels more isolated to fight their cause. Otherwise, with the likes of Holland, Malaysia and Australia suffering the most in this conflict, there is sure to be further sanctions and actions taken against the Russians at a time when their popularity hits a new low. From a market standpoint, we are likely to see people come back out of their bunkers and start buying back into the markets in the near future. Throughout the last year everyone has been buying into the dips and yesterday’s crash just provides yet another one in what is more a humanitarian disaster than a financial one.

Geopolitical fears ramped up yet further yesterday, with the announcement that Israel had begun a ground offensive within Gaza following 10 days of aerial bombardment. The ongoing narrative behind this conflict has been one of Israel seeking to destroy Hamas owned weaponry as they seek to put an end to the constant missiles being sent from Gaza to Israel. However, with civilian casualties being the only outcome that has been seen globally, it is clear that Israel are doing themselves no favours from a PR standpoint. Thus yesterday’s move can be seen in two lights, with many deploring such an attack on another sovereign land as a tragedy which would be breaking global conventions. Yet it is also an opportunity for the Israeli forces to take out key military targets without the same risk to civilian lives and for that I believe this move could be something that may spare lives rather than take them. The big question is for how long is this offensive going to last and to what extent they are successful in finding and destroying Hamas weaponry. Hamas has shown itself to be unwilling to negotiate as shown by their disregard for any ceasefire, and thus it is more than likely that we will simply see more rockets fire upon completion of the Israeli air offensive. Ultimately, there is likely to be conflict within the region for some time yet and whilst the financial market’s response will likely be short-lived, the humanitarian and sectarian impact will last a lot longer.

Moving on to more standard affairs, the release of Japanese monetary policy minutes overnight provided markets with an opportunity to gauge yet again whether the BoJ will move to heighten the rate of asset purchases in response to a weakening in the region following the sales tax in April. What the minutes did provide us with was a vague timeline for asset purchases, given the commitment to keep QE in place until the 2% inflation target was reached. However, this was always likely to be the case and thus markets turned their attention to a speech from BoJ governor Kuroda in Tokyo. In his speech, Kuroda seemed significantly more hawkish than usual, seeing current conditions as being satisfactory. Kuroda’s regarded the current value of the yen as no longer excessively strong, whilst also seeming confident that the economy was well on its way to reaching the 2% inflation target. Given the likeliness that either the further depreciation of the yen or a boost to inflation was going to be the catalyst for another rise in the rate of asset purchases, this has come as a shock to the markets, with the Nikkei tumbling throughout the Asian session. As such, it now seems likely that Japan could remain steady with its monetary policy for some time, which is likely to unravel some of those yen shorts backed by those expecting further easing from the BoJ.

Finally, the European session also sees Bundesbank President Jens Weidmann speak, at a time when the Eurozone is facing a critical deflationary threat and the German economy is showing signs of weakening across the board. The imposition of TLTRO’s, negative deposit rates and alike by Mario Draghi took the headlines upon announcement, yet markets remain unconvinced with many seeing the imposition of asset purchases as a necessary to bring the area back into strong price and GDP growth. However, Weidmann has been somewhat mixed on the matter and as such any leaning towards the creation of a QE programme would likely spark markets into a more bullish mind-set given the German influence upon the ECB. It will also be key to note how Weidmann sees the German economy developing following disappointing ZEW, factory orders, retail sales and unemployment claims figures. For the Eurozone to thrive, a strong Germany is a necessity and thus whilst many within Germany had expected a weaker Q2, this trend cannot last for long and markets will be looking for signs of hope from today’s speech.