Global Markets Overview – 3/3/14

Ukraine Peace Deal Halts Violence but Crowds still Angry Reuters

The geopolitical tinder box - Ukraine

Markets have a lot to digest this morning; a geopolitical crisis in Ukraine, China's PMI index beating expectations (which was a surprise) and the start of central bank week. But the biggest talking point is the developments out of Crimea.

The Ukrainian situation is a tinder box in the making; the geopolitical crisis from the Kiev revolution has escalated even further overnight, with the one-day old head of the Ukrainian navy defecting to the pro-Russian self-elected Prime Minister of Crimea. Kiev has reacted by charging the Admiral with treason. There are also reports that Russian troops are surrounding Ukrainian army bases in the region as the Sevastopol Bay sees Russian warships entering the mouth of the port and passing freely into the Russian navy base.

The market to watch is Brent, which has spiked each time more details of the situation emerge. The price of oil has risen a full dollar over the weekend, and it will be interesting to see how the markets behave once Asia sits down to digest the developments from the weekend.

Other markets to watch can be reviewed through history. The possible response to the Ukrainian developments are hard to quantify currently; however during the five-day war (Russo-Georgian War) in 2008, reactions in typical markets were mixed; gold actually contracted over the five days, oil traded sideways, but EUR/USD fell through the floor from $1.532 to $1.493 on the opening day and dropped for the preceding four.

The major difference between the five-day war and the Crimea situations is the cultural and political divides are larger and more pronounced, with greater possibilities for flare ups and conflict over the longer term. On the opening of the currency markets this morning the EUR and the JPY are seeing increased activity as safety is bid up and geographical tensions hit risk.

The other part to this story will be the Russian side; inflation in Russia is over 6% and the likely reaction from the weekend's development is for the US (and its allies) to cut funding to Russia, which will see the Ruble (RUB) come under real pressure. It will have a pronounced impact on the Russian economy as inflation flares up over the coming months.

US futures open at 10am AEDT; all eyes will be on these for how the rest of the full trading day that is March 3will pan out. Expectations are that with a market that has made an intraday record high on Friday night will use a geopolitical crisis as an excuse to sell off and commodities fluctuate.

Ahead of the Australian open

Offsetting the geopolitical concerns from the weekend was China's surprise with an official PMI print of 50.2. As mild as that is, the spreads in the CNY on Friday suggested the PBoC was looking for a contraction. Several major investment banks were communicating on Friday that the only player that could move the market the way it did was the PBoC and it suggested it was concerned a contraction was emanate. The open in Shanghai will be a major determinate of how the Australian market will trade in the afternoon.

It is also the start of central bank week; the RBA is in clear focus as we await the press statement once more having seen a breakdown of domestic conditions. How much emphasis is placed on the private expenditure numbers from last Thursday will be interesting. It was the worst forward read in 20 years, yet the market is full aware the RBA is not going to move on rates.

So the question becomes; how does the RBA keep the economy flowing if blunt monetary policy tools have been put but in the tool bag? The statement will be watched, with the most amount of interest around as to whether the bank holds the neutral call.

Based on Saturday's close of the futures market we are currently calling the market up 17 points on the 10am bell (AEDT) to 5421, however the opening of the US futures will be what drives the first few hours of trade. The opening of China will then take over in the afternoon; the European futures will also be watched later today as a US press release at 8:00am AEDT stated that Russia has taken complete control of Crimea.

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