Equities drift higher on relief rally

Thursday, February 12, 2015

A generally positive session for European equity markets despite ongoing uncertainty surrounding Greece’s future in the eurozone as talks mediated by Germany and France between Russia and Ukraine resulted in a ceasefire. After weeks of escalating hostilities from both sides and talks that lasted 16 hours it seems that both sides have agreed to a plan implementing the failed ceasefire agreement which was reached in September last year. Due to take in effect on Saturday, the withdrawal of heavy weapons along a 400km stretch of the Russia-Ukraine border as well as control reverting to Kiev and a 50km buffer zone between the opposing sides saw investors breathe a sigh of relief on hopes for a gradual return to stability.

With the IMF recently announcing a fresh $17.5bn bailout package for Ukraine in an effort to shore up public finances market participants hope that the progress made so far will catalyse into the eventual easing of economic sanctions imposed by the US and EU. However, any reluctance from Russian forces to stand down and negotiate peaceful terms could see further sanctions imposed on an already ailing Russian economy. After slipping to a record low of 79.1688 against the dollar late last year before rallying over 35% towards 50.6481 in late December as hopes for a peaceful conclusion saw investors pile in to the rouble. The Russian currency has weakened throughout January and early February and currently trades towards 65.7780 against the dollar, slipping over 18% since the start of the year. Spikes back towards historical lows could be seen in the rouble over the near term if the threat of further economic sanctions materialises.

The Bank of England released their inflation report earlier today, surprising market participants with the outlook that there was an increasing likelihood of inflation falling below zero in the near future with inflationary pressure rising rapidly towards the end of the year. The report went further to state that markets had got ahead of themselves in their expectation of no rates rise until late 2016. Opening up the possibility for rates to be cut below 0.5% the central bank stated that it did not expect banks to cease lending even if it did cut rates further. The release of the report saw sterling trade higher as it rallied almost 0.9% immediately after the release, trading towards 1.54 against the dollar.

Tomorrow sees the release of Q4 eurozone GDP as well as preliminary manufacturing and services PMI data which could offer further support to risk assets towards the end of the week. Despite a number of issues presenting significant headwinds to investors this week, the pent up appetite for higher yields is fast becoming apparent and any significant progress regarding Greece’s bailout could support equity markets higher. 

RUB continues to consolidate around recent lows

USDRUB Curncy Russian Ruble SPO 2015 02 12 15 52 01

Sterling rallies after BoE inflation report

GBP Curncy British Pound Spot 2015 02 12 15 52 24

Topics: GDP, ECB, EUR, RUB
More from: Kash Kamal