European Tension Outweighs Jobless Report
US traders shrugged off positive labor market data, instead focusing on developments in Europe, as Russia slapped retaliatory sanctions on the West.
Thursday, August 7, 2014 - 00:00
Russian authorities agreed to prohibit food imports from Europe and the US, effective immediately. The ban, which will last for one year, covers certain food and drinks products. Prime Minister, Dmitry Medvedev, said Western sanctions were a ‘dead-end track’. He added that his country’s response ‘was not an easy decision to take’. Moscow may have been spurred by a flare-up in tension after Polish leaders noted the growing risk of direct Russian intervention in eastern Ukraine. The North Atlantic Treaty Organization (NATO) leader, Anders Rasmussen, advised Russia ‘to step back from the brink’.
While today’s sanctions are not expected to have a significant impact on US exporters, they have had a negative impact on sentiment. The S&P 500 opened in the green, initially rising 0.3% to 1926.06 before turning negative by 11:30 EDT. The Dow Jones Industrial Average followed a similar trend. The decline came despite buoyant data that showed jobless claims fell to 289,000 last week. The four-week average in fresh claims declined to 293,500 - an eight-year low. The statistics were particularly encouraging after July’s somewhat disappointing 209,000 rise in nonfarm payrolls.
Bullish investors may also have reconsidered their outlook following comments from Governor of the Reserve Bank of India (RBI), Raghuram Rajan, suggesting frothiness in financial markets. Rajan, who foresaw the financial crisis of 2009, said ‘we are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost’. The former IMF Chief Economist added that it will take a ‘big hope and a prayer’ for central banks to unwind their substantial monetary accommodation without sparking major market volatility.
Away from Moscow, Europe’s two major central banks made no change to interest rates. The European Central Bank (ECB) maintained its current policy stance despite muted price pressure and an increasingly bearish economic outlook. ECB President, Mario Draghi, reported increased downside risks from geopolitical tension and weakness in some emerging markets. Draghi talked down the common currency, noting that monetary policy in the euro area and US ‘are and are going to stay on a divergent path for a long period of time’. Soon after, EUR/USD fell 0.3% to 1.3344. Separately, the Bank of England’s Monetary Policy Committee also maintained interest rates at their current level.
Highly-rated fixed income securities did well from the combination of continued monetary accommodation and politically-driven risk aversion. Traditionally secure government bonds saw their yields decline. The two-year bund turned negative in early morning trading, while its ten-year counterpart fell to 1.09%. The equivalent ten-year US treasury offered a comparatively rich 2.46%. Any perceived flight to safety did not immediately benefit gold, however. The yellow metal struggled to record gains following a 2% rise yesterday.
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