Good morning. Here's what you need to know.
Traders eyeing Crimea. The focus is on Ukraine's Crimea region, an area home to many ethnic Russians, which will hold a referendum over the weekend on declaring independence from Ukraine. The market angst over the recent conflict between Russia and Ukraine in recent days has stemmed largely from military developments in Crimea. "Much of Europe, the U.S. and Japan have warned that they do not recognize the referendum," says Marc Chandler, global head of currency strategy at Brown Brothers Harriman. "The next level of sanctions against Russia will likely be announced shortly after the referendum. At the same time, reports suggest a build-up of Russian forces on the Ukrainian border. While they are most likely for defensive purposes, many fear that Russia may expand its operations shortly. Meanwhile, U.S. aid ($1 billion) is tied up in the Senate as it has become entangled in the debate over IMF reform. Ukraine reportedly has sought military assistance from the U.S., which has not directly refused, but has indicated not now."
Markets are mixed. S&P 500 futures and U.S. Treasury futures both point to a slightly positive open. The U.S. dollar is down another 0.4% against the Japanese yen today, trading just above ¥101.40. European indices are extending yesterday's losses — right now the Spanish IBEX 35 is down 1.0%. Overnight, Asian indices took a beating — the Japanese Nikkei 225 closed down 3.3%, the Hong Kong Hang Seng gave up 1.0%, and the Shanghai Composite lost 0.7%. "Yesterday’s Ukraine threat roller-coaster may not reverse today ahead of the Crimean election over the weekend," says David Keeble, head of fixed income strategy at Crédit Agricole. "The main unknowns are not the referendum result or that sanction threats will be displayed, but rather if violence erupts in Crimea, and whether the Russians instantly annex Crimea or play out a waiting game to achieve the same result in the future along with some legal niceties. It all suggests playing it cautious, which is what some clients were doing on Thursday — buying back their shorts."
Emergency unemployment benefits back in play. Senators have proposed extending the emergency unemployment compensation program that expired at the end of 2013, but such a bill will be difficult to get through Congress. Chris Krueger, a Washington, D.C.-based policy analyst at Guggenheim Securities, has the details: "The compromise would retroactively restore for five months long-term unemployment benefits that expired on Dec. 28 (they would expire at the end of May). The bill would be paid for by a combination of: pension smoothing, PBGC reforms, extension of U.S. Customs fees, and a prohibition for millionaires and billionaires to receive benefits. The bill would also put into place certain reforms of the unemployment benefits program advocated for by Senate Republicans. The five Republicans who brokered the deal were all from high unemployment states: Sens. Heller (R-Nev.), Portman (R-OH), Murkowksi (R-Alaska), Kirk (R-Ill.), and Collins (R-Maine). If the compromise clears the Senate (we believe that it will), it will very likely not move in the House. The House GOP may pass their own bill to provide some relief to the long-term unemployed after feeling pressure from their Senate colleagues, but the legislation would likely be as foreign to Senate Democrats as this current compromise is to House Republicans."
Custody holdings tank. In the week between March 5 and March 12, foreign central banks removed $104 billion of U.S. Treasuries that were being held in custodial accounts at the Federal Reserve. This is the largest weekly drop on record — the second-largest weekly drop was $32 billion, recorded amid the market turmoil of the summer of 2013. The leading theory is that Russia is likely trying to get ahead of any international sanctions that could be placed against it if the conflict with Ukraine escalates, and is therefore behind the large drop in holdings. "Given that the market has rallied through the course of the week, we do not believe that this represents selling by the central bank community," say Shyam Rajan and Priya Misra, interest rate strategists at BofA Merrill Lynch. "Instead, the drop can likely be attributed to a shift in custodians by one of the major central banks."
Bank of Japan pleased with progress. The minutes of the Bank of Japan's February 17-18 meeting showed that monetary policymakers expected the economy and prices to continue improving in line with their forecasts. The minutes also revealed a consensus view that the consumption tax hike scheduled for April will not derail the economy. This line of thinking may hold the BoJ back from expanding its stimulus program in the coming months.
Japanese industrial production rises. Japanese industrial output expanded by 3.8% from the previous month in January, marking an acceleration from December's 0.9% gain but failing to meet expectations for a 4% advance. The year-over-year rate of expansion in output accelerated to 10.3% from 7.1%.
U.K. trade deficit widens. The U.K. posted a visible trade deficit (one that includes goods but not services) of £9.79 billion in January, up from £7.66 billion in December. The non-EU trade deficit swelled to £3.99 billion from £2.32 billion. Both numbers were larger than expected, and owed largely to a 4% drop in exports to the lowest level since June 2012.
U.K construction output rises. U.K. construction output expanded by 1.8% from the previous month in January, besting expectations for a 1.5% gain. The year-over-year growth rate in output accelerated to 5.4% from 4.9%, exceeding expectations for a smaller acceleration to 5.2%.
Producer prices on deck. February U.S. producer prices data are released at 8:30 AM ET. Economists predict prices rose 0.2% from the previous month in February, matching January's pace of growth and leaving the year-over-year price rise unchanged from January at 1.2%. Excluding food and energy, prices are expected to have risen only 0.1% last month, but the year-over-year rate of change is expected to have received a boost to 1.4% in February from 1.3% in January.
Consumer confidence to wrap things up. Preliminary results of the University of Michigan's monthly consumer confidence survey are released at 9:55 AM. Economists predict the report's headline index rose to 82 from February's 81.6 reading.
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