Yen Gains With Dollar as Putin Sparks Haven Asset Demand
The yen and the dollar climbed while commodity and emerging-market currencies weakened with U.S. Secretary of State John Kerry preparing to visit Kiev as Russia seized control of Ukraine’s Crimea region, intensifying one of the most serious standoffs since the Cold War ended.
The greenback will outperform amid rising volatility, while there’ll be an automatic selloff in the ruble as commodity currencies and Asian equities come under pressure, said Sebastien Galy at Societe Generale SA in New York. Haven assets such as Treasuries will climb as investors assess the impact on commodities, said Ian Lyngen at CRT Capital Group LLC.
At the end of a month in which global equities, bonds and commodities rose together for the first time since July, the crisis in Ukraine deteriorated as President Vladimir Putin won parliamentary backing to send troops into Russia’s southern neighbor. Crimea, where Russian speakers comprise the majority, has become the focal point of Ukraine’s crisis after an uprising that triggered last month’s overthrow of President Viktor Yanukovych. Ukraine has put its forces on combat readiness and U.S. President Barack Obama warned Russia not to intervene.
“It’s going to be a classic flight to quality move,” Lyngen said by phone from Stamford, Connecticut. “The market is more focused on the extent to which Russia is willing to press their case and how escalated the conflict becomes. They just want to make sure that if there is some big move that has bigger implications that they’re not caught on the wrong side of it.”
The yen climbed 0.3 percent to 101.52 per dollar as of 8 a.m. in Tokyo, and reached 101.30, the strongest level since Feb. 6. The euro declined 0.2 percent to $1.3775, and lost 0.5 percent against Japan’s currency. Australia’s dollar slid as much as 0.4 percent to a one-month low of 88.92 U.S. cents while the New Zealand dollar declined 0.4 percent versus the greenback after two days of gains.
“Aussie dollar, kiwi, Canadian dollar are not going to be very happy places,” Galy, a senior currency strategist for SocGen, said in a phone interview.
Poland’s zloty weakened 0.8 percent to 3.0378 a dollar in early trading and the Czech koruna decreased 0.2 percent, retreating for the first time in three days. The Hungarian forint lost 0.6 percent. A Bloomberg gauge of 20 developing-nation currencies rose 0.2 percent on Feb. 28 after weaker-than-estimated U.S. growth data boosted speculation that the Federal Reserve will continue to support the economy.
Ethnic strife erupted in Ukraine’s Crimea region after an uprising led to last week’s overthrow of Yanukovych, who fled to Russia.
Lawmakers in Moscow gave Putin the right to send forces to protect ethnic Russians in Crimea after unidentified troops seized facilities in the Black Sea region. Ukraine is on the “brink of disaster,” Prime Minister Arseniy Yatsenyuk said yesterday, while Secretary of State Kerry said they are weighing sanctions against Russia for their actions.
New Zealand’s NZX 50 Index (NZSE50FG), the first major stock market to open in the Asia Pacific, lost 0.3 percent today. Gold jumped 0.7 percent to $1,335.49 an ounce, after surging 6.6 percent in the spot market in February, the steepest monthly surge since July.
Yields on Australian (GACGB10) 10-year government bonds fell a sixth day, declining three basis points to 3.99 percent. The Markit iTraxx Australia index of credit default swaps climbed by 2 basis points to 103.5 basis points as of 8:38 a.m. in Sydney, according to National Australia Bank Ltd. prices. The gauge was last higher on Feb. 7, according to CMA prices.
In the Middle East yesterday, Dubai’s DFM General Index (ADSMI) of stocks dropped 0.9 percent, the most since Feb. 23, while Abu Dhabi’s stock measure lost 0.3 percent. Japanese index futures added 0.8 percent in Osaka at the end of last week, after the Standard & Poor’s 500 Index closed 0.3 percent higher Feb. 28 at a record high.
Putin told German Chancellor Angela Merkel that Russia’s measures are “appropriate for the extraordinary situation,” during a phone call, according to a statement on the Kremlin’s website. Russian citizens and Russian speakers in Ukraine remain under threat from ultra-nationalists, Putin said. Prime Minister Dmitry Medvedev said on his Facebook page that ousted Yanukovych remained Ukraine’s legitimate leader, though his authority has been almost destroyed.
The tension in Ukraine comes against a backdrop of improved global growth and U.S. corporate profits that have helped spur speculation over whether the Federal Reserve will speed the pace at which it tapers its bond-buying program. At the same time, concerns are rising about a slowdown in China and escalating political turmoil in countries from Thailand to Turkey to Venezuela.
HSBC Holdings Plc and Markit Economics Ltd. release their China manufacturing purchasing managers’ index today, with economists surveyed by Bloomberg predicting a second month of contraction. A gauge of Chinese factory output released at the weekend dropped to 50.2 for February, from 50.5 in January. Analysts polled by Bloomberg projected a reading of 50.1 with levels below 50 signaling shrinking output.
The International Monetary Fund projects the global economy will expand 3.7 percent this year, up from 3 percent in 2013. A report Feb. 28 showed U.S. gross domestic product grew 2.4 percent in the fourth quarter, revised down from 3.2 percent. Adjusted earnings per share have beaten analysts’ average estimates at 74 percent of the 489 companies in the Standard & Poor’s 500 that reported results for the latest quarter, according to data compiled by Bloomberg.
Crude oil and natural gas prices may rise on concern the friction between Russia and Ukraine will curtail energy supplies. Russia is the world’s largest energy exporter.
“The immediate future is one for higher oil and gas prices,” Saxo Bank A/S commodity strategist Ole Hansen in Copenhagen said. “We’re dealing with a geopolitical crisis. There’s a lot of risk in the market, so the likely reaction is one of caution and that’s probably going to take prices higher.”
Brent crude oil fell for the first time in four weeks, losing 0.7 percent to $109.07 a barrel last week, while natural gas futures sank 25 percent, the worst weekly slump since 1996.
European consumers of Russian gas probably won’t see shortages in the fuel used for power generation and heating as a result of the crisis, since alternative supply routes exist and Russia needs the export income, Dubai-based consultant Robin Mills said.
“If there were a disruption, and there’s no sign of one yet, Europe is in a better position to handle such a situation,” said Mills, head of consulting at Manaar Energy Consulting and Project Management. “Ukraine is not as important a transit state for gas as it used to be. The Europeans have made a big push to develop gas storage and strategic interconnections between countries to allow gas to flow more easily where it’s needed.”
Benchmark 10-year Treasuries climbed last week, pushing yields down to 2.65 percent from 2.73 percent Feb. 21. The yen rose 0.7 percent against the dollar last week, while the Bloomberg Dollar Spot Index fell 0.4 percent to 1,016.74. The custom Bloomberg gauge of emerging-market currencies rose 0.2 percent, capping its first monthly gain since October.
The turmoil in Ukraine threatens to upend markets after a month in which the Bank of America Merrill Lynch Global Broad Market Index of bonds returned 0.5 percent, including reinvested interest. The MSCI All-Country World Index of stocks climbed 4.9 percent including dividends in February, its strongest advance since September, and the MSCI Emerging Markets Index jumped 3.3 percent, its first gain since October.
The Standard & Poor’s GSCI Total Return Index of commodities rose 4.5 percent as spot gold soared 6.6 percent in February.
Russia, which has offered citizenship to Ukrainian officers at bases in Crimea, according to acting Interior Minister Arsen Avakov, suspended a $15 billion bailout agreement last week that Putin and Yanukovych signed in December.
Ukraine’s new government, confirmed by lawmakers last week, wants as much as $35 billion in international aid over the next two years to avert a default. The U.S. and European Union have pledged assistance.
The crisis may have to escalate further before any sell-off of high-risk assets is sustained, Rami Sidani, the head of Middle East and North Africa investments at Schroder Investment Management Ltd. in Dubai, said by phone.
“It seems like the conflict is more of a power struggle that is contained within the Ukrainian border,” he said. “We don’t see any real impact on the global markets, at least not yet. It’s hard to speculate what’s going to happen next. But so far we don’t really see a systemic risk.”
Russian bonds and the ruble may fall as investors judge them most vulnerable to an emerging-markets sell-off, according to Kadir Hussain, who helps oversee $700 million as chief executive officer at Mashreq Capital DIFC Ltd., and holds some of the nation’s sovereign and corporate debt. The ruble declined 2.9 percent versus the dollar last month, the biggest drop among 24 emerging-market peers tracked by Bloomberg.
“The Russian space is going to be more fundamentally driven in the sense that I don’t think that that space has really seen the risk profile change,” he said. “Russia has always been involved in Ukraine, but now that it’s said that it won’t back down and has approved military action, that’s a whole different pattern.”
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