Market Drivers for April 25 2014

UK Retail Sales a bit better

Tensions in Ukraine escalate as PM says Russia wants to start WW3

Nikkei 0.17% Europe -0.72%

Oil $101/bbl

Gold $1293/oz.

Europe and Asia:

JPY Core CPI 1.3% vs. 1.4%

GBP UK Retail Sales 0.1% vs. 0.4%

GBP BBA Mortgages 45.9K vs. 48.9K

North America:

USD Flash Services PMI 9:45 AM

USD U of M 9:55 AM

Tensions over the Ukraine conflict escalated in overnight trade with Ukrainian Prime Minister accusing Vladimir Putin of “wanting to start World War 3” and the heightened rhetoric took its toll on USD/JPY which slipped to session lows by mid-morning European dealing. The war of words continued with Mr. Putin stating that Russia should increase production anti-missile systems.

Meanwhile on the economic front, Russia took two hits today with S&P downgrading the country’s debt to near junk bond status while the Russian central bank raised the key rate by 50 basis points to 7.5%. The S&P, in their decision, noted that, “”In our view, the tense geopolitical situation between Russia and Ukraine could see additional significant outflows of both foreign and domestic capital from the Russian economy and hence further undermine already weakening growth prospects,” The move by the Russian central bank was driven by “the weak ruble and high inflation costs”, but smacks of desperation by Russian monetary authorities as they try to stem the tide of capital outflow.

The key question with respect to Putin is whether the current economic pain will make him reconsider his bellicose actions or whether instead it will only exacerbate the conflict by sparking a full Russian military invasion of east Ukraine in order to deflect the attention from the deteriorating conditions at home. Given Mr. Putin actions and words the latter scenario appears to be increasingly more likely and although ,markets remain relatively non chalant about the growing geopolitical risks, they will react negatively and USD/JPY could see further downside pressure as the day proceeds as traders may want to square up ahead of the weekend.

Elsewhere, on the economic front the UK Retail Sales printed at 0.1% versus -0.4% eyed as rise in fuel related costs helped boost volumes. The ONS also said that non-food stores saw an increase of 9.6% – the biggest rise since 2002 which may have been weather related. The upside surprise in Retail Sales was somewhat offset by the drop in BBA Mortgage approvals which declined to 45.9K from 48.9K. However, the overall news was enough to lift cable through the 1.6800 barrier as UK economy continues to show steady pace of growth. The pound remains capped by the 1.6850 level which has failed four times this year, but if the bulls can push the pair through that barrier cable could be on the path towards the key 1.7000 mark over the next several weeks.

In North America, the calendar is quiet today with only the second revision of U of M data on the docket. Although earnings season has been relatively robust, equities may wobble into the weekend if developments in Ukraine show further escalation tension. For now the 102.00 support in USD/JPY is holding but it may crumble as the weekend approaches.

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