Good morning. Here’s what you need to know.
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 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 6.1790 per dollar.
Markets up. Global financial markets are taking a sanguine view of developments over the weekend. S&P 500 futures are solidly in positive territory, while U.S. Treasury note futures are trading lower and gold has erased overnight gains. The U.S. dollar is stronger against the Japanese yen and lower against the euro. Copper futures are up nicely as well following a big drop last week on fears related to China’s fragile shadow banking system. The Russian ruble is losing a bit of ground against the dollar, but Russia’s MICEX equity index is up more than 3%. European indices are all rising to begin the week, as did most Asian indices (with the exception of Japan, Australia, and Indonesia). “Risk-correlated currencies consolidated and safe haven currencies lost some ground at the start of the week after the Crimean referendum to join Russia passed and the China doubled the trading band of CNY. Investors’ take could be that the events could point at lower EM volatility ahead,” says Valentin Marinov, a currency strategist at Citi. “We think that there are risks to the above view. We think that market risk aversion could still escalate on the back of more tensions between Russia and Ukraine as well as more uncertainty about the Chinese growth outlook.”
Euro zone inflation. Eurostat’s final estimate of February HICP inflation data indicated that euro zone consumer prices rose only 0.3% in February from the month before — below its initial 0.4% estimate — bringing the year-over-year growth rate to 0.7% from the previous 0.8% estimate and marking a decline from January’s 0.8% year-over-year change. The year-over-year rate of change of core consumer prices was unchanged from January and the initial February estimate of 1.0%. Many expect this month to mark the bottom in euro zone consumer prices, which may restrain the European Central Bank from announcing additional easing measures going forward.
Empire manufacturing. Out at 8:30 AM ET are the results of the New York Fed’s monthly Empire State Manufacturing Survey. The report’s headline index is expected to rise to 7.00 from the February survey’s 4.48 reading, indicative of an improvement in business conditions for manufacturing firms in the state of New York over the last month.
Industrial production. The big economic data release in the United States today is the monthly industrial production report, due out at 9:15 AM. Economists predict total output rose 0.2% in February after falling 0.3% in January. Manufacturing production is expected to have risen 0.3% in February after staging a 0.8% decline in January. Weakness in the January report was largely attributed to weather disruptions.
NAHB housing. The final U.S. economic data release today is the National Association of Home Builders/Wells Fargo Housing Market Index, due out at 10 AM ET. Economists predict the index moved back up to 50 in March after falling to 46 in February from 56 in January — the largest one-month drop ever.
FOMC. The big event on the calendar this week is the March FOMC meeting, which will be held on Tuesday and Wednesday, along with the subsequent monetary policy announcement and Janet Yellen’s first FOMC press conference as chairman of the Federal Reserve. The consensus view is that the Fed will reduce the pace of monthly bond purchases it makes under its quantitative easing program to $US55 billion from $US65 billion. Opinions are more split on what the Committee will choose to do with its forward guidance on the likely future path of short-term interest rates.
The hunt for MH370 continues. The disappearance of Malaysian Airlines flight MH370 continues to captivate onlookers around the world as the search for the missing plane drags on. According to reports, U.S. investigators are growing more convinced that the plane is somewhere west of Australia in the Indian Ocean.
Beer companies withdraw parade sponsorship. Guinness USA, Heineken USA, and the Boston Beer Company (the brewer of Sam Adams beer) have withdrawn sponsorships of St. Patrick’s Day parades in New York City and Boston in protest of a ban on gay groups expressing their sexuality during the parades. That leaves Ford Motor Company as the last major sponsor of the NYC event.
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