Changing Financial Market Dynamics is an Opportunity

Oil prices posted their weekly gain as rising tension in Ukraine made market watchers nervous about additional sanctions on Russia and positive U.S. economic data lifted demand expectations. WTI was at US$95.96/ Barrel and Brent was at US$103.19/ Barrel by end of last week. The Natural Gas price was above US$4/MMBU by end of last week on hopes of rising temperatures. Gold had pulled back from one-week highs of US$1297/ Ounce last week after stronger U.S. economic data cooled demand for the haven asset, but prices remain elevated as investors monitor escalating tensions between Ukraine and Russia. It ended last week at US$1287/ Ounce. Silver price also followed similar trends and ended last week at US$19.46/ Ounce.

The US dollar index was at 11 month high last week on account of Ukraine tensions and positive US economic data, it ended last week at 82.74. The consumer sentiment index was revised to 82.5 for August 2014, up from a preliminary reading of 79.2, exceeding expectations for a reading of 80.1.

The release of upbeat U.S. consumer sentiment data fuelled further optimism over the strength of the country’s economic recovery. The Chicago purchasing managers’ index rose to 64.3 in August 2014 beating expectations for an increase to 56.0.The Euro had closed at 1.3132US$ by end of last week. The preliminary data showed that euro zone consumer price inflation ticked down to an annualized rate of 0.3% this month from 0.4% in July 2014 and Euro zone’s unemployment rate remained unchanged at 11.5% last month. However official data showed that German retail sales declined 1.4% in July, disappointing expectations for a 0.1% rise. The Pound rose against the dollar last Friday and closed at $1.6597. The dollar also arose against the Yen last Friday and closed at 104.09. Inflation data released last Friday showed growth below the Bank of Japan’s 2% goal. The nationwide core consumer-price index signaled that consumers remain unwilling to spend and companies continue to grapple with tepid demand and high inventories.

The US 10 year treasury yield closed at 2.343% last week, it had fallen to 2.334% the lowest closing level since June 2013. US economy grew at 4.2% in 2nd quarter of 2014 while pending purchases of existing homes rose 3.3% in July2014.Despite the positive economic data US Government-bond yields touched new lows as investors piled into safe debt on account of Ukraine tensions. There were expectations of interest rate rise at the beginning of the year which send bond prices lower as the U.S. economy picked up speed and the Federal Reserve reduced its monthly stimulus, which will end in October 2014. However the Federal Reserve has kept interest rate hike options open and will monitor incoming information on labor markets and inflation to determine appropriate stance of monetary policy. This has prevented the surge in US bond yields as witnessed earlier. The German 10 year bund yield closed at 0.89% last week, and had fallen to lowest level in 2014 last week as German bond prices rallied. The Euro growth is slow and there are expectations that European Central Bank (ECB) will commit to purchasing bonds to boost economic growth. The expected ECB bond purchases and Ukraine tensions had driven up bond prices and softened the yields in Europe. GCC Sovereign yields marginally up. At the end of last week Qatar 5 CDS was at 53.5 Basis points, 5 year Dubai CDS was at 157.01 Basis points, 5 year Abu Dhabi CDS was at 51.78 Basis points, 5 year Saudi Arabia CDS was at 50.5 Basis points and 5 year Bahrain CDS was at 165.01 Basis points.

The Global Capital markets reacted adversely on account of Ukraine tensions. On a YTD Basis Dow jones is more than 3%, S&P & Nasdaq more than 8% and 9% respectively. There was nervousness that Russia was escalating its role in the Ukraine conflict. Asian equity markets ended mixed by end of the week. Japan’s industrial production in July 2014 was up by only 0.2% and also contributed to drop in Nikkei by end of last week. Nikkei index was down by more than 5% YTD. The CAC and FTSE are up by more than 1% YTD however German index was flat. The Hangseng was up by more than 6% YTD and Indian Nifty up by more than 26% YTD. The GCC markets also witnessed volatility last week due to Ukraine tensions and YTD Qatar index was up by more than 30%, Dubai up by more than 50%, Abudhabi up by more than 18%, Saudi Arabia up by more than 29%, Oman up by more than 7%, Bahrain up by more than 18% and Kuwait down by more than 1%. The markets will continue to witness volatility as European Union had given Russia one week to reverse course in Ukraine or face new sanctions. The market volatility on account of changing financial market dynamics is an opportunity.