Stock markets around the world are rising to begin the week as risk appetite makes a comeback in the marketplace.
The S&P 500 is up 1.0% early in the U.S. session, trading around 1859. The yield on the 10-year U.S. Treasury note is trading at 2.67%, about two basis points above Friday’s closing levels.
The U.S. dollar is stronger against the Japanese yen and lower against the euro. European indices are firmly in positive territory. Most Asian indices closed higher overnight, save for Japan and Australia, which both moved a bit lower.
The Russian ruble is gaining back some of its recent losses against the U.S. dollar today, and Russia’s MICEX equity index is up more than 3%. Yields on Russian government debt are falling, providing some additional relief to financial conditions there.
Copper futures are up nicely following a big drop last week on fears related to China’s fragile shadow banking system.
Two big stories over the weekend have set the tone today:
- Crimea votes for independence. On Sunday, the Ukrainian region of Crimea — an area home to many ethnic Russians — voted in a referendum to announce its independence from the Ukrainian state. Western powers have said they do not recognise the action, and the big question is whether Russia will stage additional military provocations, as well as what potential sanctions against Russia the West will bring. “Following recent risk-off price sessions and the fact that the referendum did not lead to any notable immediate violence, there may be space for an immediate relief in bond markets, and some short-covering in FX (in Central and Eastern Europe) early this week,” says a team of analysts at Nordea Markets led by Aurelija Augulyte. “Our baseline is that the conflict will not evolve to the level where tough trade/investment sanctions are imposed, or even to the level where energy supplies are cut off from Russia to Europe. Therefore, we also believe that markets will revert to look at fundamentals within weeks.”
- China widens the renminbi trading band. On Saturday, the People’s Bank of China announced a widening the daily trading band around which the value of the Chinese yuan is allowed to deviate from the daily reference rate to 2% from 1%. The move will allow for greater volatility in the U.S. dollar-Chinese yuan exchange rate, and many wonder what the announcement means for its near-term direction. The PBoC has engineered a weakening of the yuan by setting lower reference rates over the past several weeks — largely designed to shake out carry-trading speculators following an extended, multi-year period of sustained appreciation against the U.S. dollar. On Monday, the PBoC set the reference rate at 6.1321 yuan per dollar — down from Friday’s 6.1346 fix and 6.1502 close — but the yuan is trading lower, at 6.1810 per dollar.
We’ve also seen the release this morning of three U.S. economic data releases, though none of them have moved markets much:
- The New York Fed’s monthly Empire State Manufacturing Survey results revealed that business conditions for manufacturers in the state of New York improved over the last month, but not as much as market economists had forecast.
- The Federal Reserve’s monthly U.S. industrial production report said industrial output rose 0.6% in February after falling 0.2% in January, amounting to a bigger gain this month than economists expected. Capacity utilization also exceeded expectations, rising to 78.8% from 78.5%, and manufacturing production advanced 0.8% after falling 0.9% in January.
- The NAHB/Wells Fargo Housing Market Index rose to 47 from February’s 46 reading, failing to climb to the market activity-neutral 50 reading economists were looking for this month.
The charts below show price action across various markets. Across the top from left to right are the S&P 500 index, the U.S. dollar-Japanese yen exchange rate, and the euro-U.S. dollar exchange rate. Across the bottom are 10-year U.S. Treasury note futures, gold futures, and copper futures.
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