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Earlier on this week, inflation numbers in the eurozone came in at 0.7%, below market expectations of 0.8%, but still on the low side and not high enough to propel the ECB for immediate accommodative policy action. Economists are still of the opinions that inflationary pressures could subside leading to an imminent rate cut and eventually asset purchases. There has been talk in recent weeks from ECB council members on how asset purchases can be done in. The last time eurozone inflationary data came in within the ECB target of 2% was in January 2013, and according to Draghi in the March meeting, a 10% appreciation in the euro has a negative impact of 0.5%, which currency movement could well explain the anchored level of inflation in this region.
Meanwhile, there were no surprises in the Fed’s policy statement on Wednesday as the FOMC announced another $10bn tapering of its QE purchases, as had been widely anticipated. Until further confirmation in the form of incoming data indicating signs of a significant economic recovery following a weather-battered first quarter of 2014, tapering plans will likely continue as scheduled and interest rate policy will remain in tact.
Economic data in the UK surprised to the upside this week as the y-o-y rate of growth was in excess of 3% in its latest Q114 GDP releases, with leading economic indicators showing signs that the robust pace of growth is continuing into Q2.
The Russian-Ukrainian crisis continues to remain topical. Despite recent attempts of easing tensions in Ukraine, nothing seems to be pointing towards a solution to the crisis. From this point onwards, any additional sanctions on a number of Russian individuals and companies is expected to have little direct economic impact, but the country’s economy seems to be on the decline. Recently, S&P reduced Russia’s rating to BBB-, with a negative outlook, meaning that any additional downgrades would result in a sub-investment grade rating, thereby increasing pressure on Russian assets. In response, the Central Bank of Russia to the market by surprise and raised interest rates by 50bp to 7.50%. It is evident, that unless Ukrainian tensions fade away, the Russian currency continues to be exposed to significant risk diminish and subsequently high levels of inflation.
Meanwhile, the International Monetary Fund yesterday warned that additional financing could be required if the situation continues to deteriorate. The IMF, which approved a $17 billion bailout for Ukraine, stated that “a significant recalibration of the program” might be required if the situation worsens.
Despite the present of tensions in Ukraine having the capacity to unnerve financial markets, the contagion effect from the region has been somewhat limited, with equity and credit markets in particular shrugging off the potential risks.
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