Macro Weekly – Concerns over Ukraine

by: Han de Jong , Nick Kounis , Roy Teo

Macro Weekly - 3 March 2014 - Concerns over Ukraine ()
  • Big Picture: While US data continues to be affected by the weather, making it hard to gauge exactly how the economy is developing, European data is generally continuing its upward trend. Indeed, the European Commission has raised its growth forecasts. Several peripheral economies are showing promising signs. Growth is returning, making it so much easier to deal with debt problems. However, Europe is not out of the woods yet. The situation in Ukraine has clearly escalated. We assume that some sort of negotiated settlement will be achieved. Volatility and risk aversion may come in play during this process, but in such a scenario neither the global economy, nor markets for risky assets should experience a fundamental change of direction.
  • Interest rates: The higher than expected eurozone inflation numbers for February have reduced the chances of an ECB rate cut at this week’s meeting and we maintain the view that the central bank will keep rates on hold. However, we do still think that stopping SMP sterilisation by ending the absorption tender is likely. We also expect the ECB to signal that it keeps the door open to a rate cut in subsequent meetings.
  • FX: Weaker than expected US data weighed on the USD last week, though losses were minimised due to safe haven support from uncertainty surrounding Ukraine and China. Meanwhile, the higher than expected eurozone inflation numbers supported the EUR/USD. In emerging markets, domestic drivers remain the dominant force, resulting in a mixed performance. The CNY extended its slide as markets seeks further clarity from this week’s National People’s Congress.