Mark My Word

Good Morning.

Here is what is driving the markets today.

ECB President Mario Draghi stated yesterday that the central bank’s forward guidance may in fact assist in weakening the euro and possibly also result in lower real rates, dampening any fears and the risk, which the market might have and envisage, that inflation will not reach the desired level as set by its (the ECB’s) policy makers. In fact, Draghi stated in a speech in Vienna yesterday that any guidance set by the institution “creates a de facto loosening of policy stance, as real interest rates are set to fall over the projection horizon.” Furthermore, Draghi added that the spread in real interest rates between the euro and the rest of the world is likely to compress, putting downward pressure on the exchange rate. These comments come on the back of additional comments in last week’s MPC meeting when he was quoted as saying that the strong euro since 2012 has undoubtedly kept consumer prices at bay. Whilst it is nothing new that exchange rate is not a policy target for the ECB, it has become increasingly apparent that at current levels, the euro is becoming ever more crucial in the assessment of price stability.

Meanwhile, equity markets have retreated most of the gains garnered so far in 2014 as increased geo political tensions in Russia. The marked increase in risk aversion saw the German Bund and US Treasury rally whilst commodities, most notably copper, declined on the back of disappointing economic data coming out of China as Russian equity markets dropped to their lowest levels since May 2010. The ever persistent concerns of Chinese economic data missing estimates coupled with the uncertainty in Ukraine caused markets to jitter and volatility levels might begin to pick up. US Secretary of State John Kerry is expected to meet his Russian counterpart later on today in what is expected to be a last ditch effort to obstruct and prevent Sunday’s Crimea referendum. Kerry stated that the US and Europe are prepared to take serious steps if there is no sign of resolution between Ukraine and Russia. Germany’s Angela Merkel added that “if Russia continues on the course of the last week, it will not just be a catastrophe for Ukraine” but will also result in an unquantifiable economic and political damage to Russia, both in the short and long term.

Elsewhere within the Emerging Markets space, there appears to be no sign that calm is to be restored any time soon in Venezuela after weeks of violent protests against Venezuela’s current socialist administration. However, there has been no apparent indication that the recent unfolding events have spilled over into the global oil market for the time being. Death tolls in Venezuela, OPECs largest oil producer, are in excess of 25 following another series of violent exchanges between protesters and the police force. Protests and rallies for and against President Maduro are cited to have taken place in the country’s major cities. As the government seems to be struggling to contain recent violent clashes, Maduro still has the arduous task of reversing the economic trend which has left the oil-rich country laden with debt and soaring inflation. As the private sector has faltered, Venezuela imports at least two third of its food whilst GDP data has plummeted from 5.5% in 2012 to 0.7% in 2013.

Have a nice day.

Mark