Global Markets Overview – September 4, 2014

Both Sides Bury Dead as Ukraine Slides Towards War Reuters

The day to end market malaise

There is lots to be made of the cease-fire deal coming out of Ukraine overnight.

The initial reactions where very bullish, with the ruble and Micex spiking, while Western European indices broke out of their respective malaise to add 1% or more.

However, the markets got over the initial euphoria, as details of the seven-point plan were divulged showing it just maintains the status quo.

The markets fell further in the afternoon session when an email from Ukrainian Prime Minister Arseniy Yatsenyuk emerged stating "[This is] window dressing for the international community ahead of the NATO summit...[his] true plan is to ruin Ukraine and restore the Soviet Union." This suggest that some in Kiev have completely dismissed President Putin's plan and see the implied cease-fire as ploy to duck further sanctions.

So, this puts the breaking of the general market malaise back to the ECB meeting. The opinions surrounding tonight's meeting are varied. The consensus read is for a 10 basis points cut to the refinancing and deposit rates, which would see banks being charged 20 basis points for placing money with the central bank if it comes to fruition.

The consensus around a QE announcement remains the same with January the most likely start time; however there is a view more language about when it could be implemented is a high possibility in tonight's meeting.

However, what is building as an additional possibility of tonight's meeting is the purchasing of asset-backed securities. Some may define this action as QE, however we define QE as the act of printing money and the buying government bonds; buying asset-backed securities is the ECB just buying loan books to prompt further lending and no additional money printing.

JP Morgan is the latest to forecast this as a real possibility, backing Deutsche bank's call from last week. The New York based bank sees the ECB buying up to €40 billion (US$ 53 billion) of asset-backed securities; it is likely to limit itself to purchases in the new-issue market on a three-year deadline, with securities of the highest credit rates.

Whatever the outcome of tonight's meeting, the malaise is likely to be broken. The likelihood for surprise and disappointment is high which will see trading activity return, regardless of the outcomes.

Ahead of the Asian open

Although the analytical world doesn't believe there will be stimulus announced today, expectations are for further talk around inflation and whether the BoJ is seeing a sustained recovery, or if it will be forced back into the market. The moves in the JPY and the Nikkei suggest stimulus is just around the corner; if the BoJ concurs, the Nikkei will continue its march back to 16,000.

Australia will see the release of the trade balance. Expectations are for exports to have continued to slide as mining slows and demand from China remains variable. The underlying figures to watch will be the iron ore and copper reads considering the slide in the price.

We are currently calling the ASX 200 down seven points to 5649, future illustrating that the general malaise in the Australian market is here to stay for a little while longer.

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