Global Markets Overview – August 7, 2014

Tit for tat sanctions as Italy hits technical recession

Russia has responded to EU and US sanctions by placing heavy restrictions on food imports from countries that have imposed sanctions on Russia over the past few months.

The ban will be in effect for one year and considering the Netherlands, Germany and Poland are part of Russia's 15 largest food providers (as is the US) it will have an effect on agriculture providers. However, it is unlikely to have any material effect on the overall economies of these countries and is more likely to see the average Russian affected, who will now have to go without several food types.

What is becoming apparent is that the civil fighting in Eastern Ukraine is moving into its eleventh hour. President Putin will have to decide relatively quickly if he is going to act in the east of the country as Ukrainian forces upped fighting overnight to begin to encircle the final few bastions of the rebels.

If he was to invade, it would likely be under the proviso of a 'peace-keeping mission'. The other scenario is he will retract his support for the rebels, meaning the current sanctions from the US and Europe are working and are likely to spare Russia further financial hurt.

I reiterate what I said about this possible event; buyers of all things risk will disappear fast if an invasion takes place, as this is an undefinable event with an undefinable outcome for markets. Ukraine will remain a focal point for the remaining months of 2014.

What may have been missed by geopolitical headlines is that Italy entered a technical recession overnight - its third in the past six years - as German factory orders fell by the most since 2011. Italy's economy shrunk a further 0.2% in the second quarter of this year after contracting 0.1% in Q1. This saw the MIB crash 2.6% and has now entered a correction in EUR and USD terms; the DAX has also entered into correction in EUR terms and the CAC and the IBEX are flirting with it.

This all on the eve of the ECB meeting in Frankfurt, having seen negative deposit rates and record low refinancing rates of 0.15%. Further signs that Europe's third largest economy is still faltering with Germany (its largest economy) slowing (which has been almost impervious to the issues surrounding it geographically), will the planned ECB styled 'QE' be brought forward? Could rates go lower still? This is unlikely tonight, however bottom-up issues in the EU banking space are growing, with developments at Banco Espirito Santo a sharp reminder of the fact bank balance sheets in the periphery are not properly fixed and the ECB needs to act.

Ahead of the Australian open

Looking to Asia, Japan and Australia will be ones to watch from the currency front. Australia's unemployment rate has continued to creep higher over the past two years, and at 6% it's still 0.25% away from the central government's expectations. It's unlikely to move today, however full time employment remains constrained and this could dampen the expected 13,200 jobs added as part-time employment fills the gaps.

We are calling the ASX 200 down 0.14% to 5507, as earnings season here is full pace, with the first of top 20 stocks to report today being Rio. However, the market will have to wait until tomorrow to react to the numbers considering Rio releases after-market here and pre-market in London (16:15 AEST); first-half profit is expected to be US$4.7billion, with revenue at US$24.6 billion.

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