Global Markets Overview – July 30, 2014

Sanctions and the macro events of the week

The week has been building to today's macro events with Washington taking centre stage; however I do need to concentrate on the developments overnight.

Overnight there were further signs that the crises in the Middle East are continuing to escalate as Israel and Palestine ramped up hostilities. Iraq is simmering as is Libya and Eurasia had more pressure heaped on it as Russia had new sanctions imposed.

The sanctions announced overnight are twofold. The EU constricted Russia's access to EU financing, EU advanced technologies (particularly technologies around oil moderation), and added further diplomatic freezes. The crux of the sanctions means EU nationals and firms are now not allowed to buy or sell new bonds, equities or any other similar instruments with a maturity of 90 days that are issued by state-owned Russian enterprises in finance and defence.

The embargo also applies to the sale of arms to Russia - this is going to hit the French the hardest as the likes of EADS who supplies defence contracts to Russia will lose out. The end result really is that it has brought the EU sanctions in-line with the US' original stance.

Lastly overnight, the US went further by targeting three major Russian banks that provide financing to the Russian military and a state-owned shipbuilder which has supply contracts with the Russian navy. The US ceased credit that encourages exports to Russia, while also prohibiting exports of technologies to the Russian energy space.

These are hard-hitting sanctions and it will put Micex under severe pressuretonight along with the ruble, both of which were closed when the sanctions were released. Expectations are for both to experience very sharp falls when they re-open for business tonight, as EU and Russian investors repatriate funds rapidly before the August 1 deadline is enacted.

Moving away from the geopolitics to economics, the release of the second-quarter GDP number and the eagerly-awaited Fed monetary policy have seen investors in a hush for the past few days as they look for direction from both. Expectations for Q2 GDP is for a very solid bounce of 3% quarter-on-quarter. It could be even stronger as the annual revisions of the report will also be released with this report, which could impact interpretations to the upside.

This brings the Fed into play: GDP is actively watched by the FOMC and if the figure is growing at a rate higher than official estimates, chatter of rate rises will hit the Street. The auto setting around the ending of the asset-purchase program will continue meaning the Fed will purchase treasuries and mortgage-backed securities at $25 billion a month. However, it is the direction and timing in the Fed funds rate that the street is looking for. Interestingly, most pundits see a high probability of 'no comment' when it comes to future moves. The economic picture, particularly inflation data, is firm enough to move the voting member.

What might eventuate is Dallas Fed member Richard Fisher, who only has a handful of meetings left before ending his tenure, may descent from voting in the coming meeting, after having released some pretty hard-hitting comments in the past week about the Fed's policy. Macro musing will be a massive driver over the next 24 hours.

Ahead of the Australian open

This could be the final day of hushed moves for the local market as the Fed and end of the month trading tomorrow will create some energy in the market. We are calling the ASX 200 down three points to 5585, but again the moves are fairly inconsistent leading into tonight's news. The spot iron ore price was back online and added 1%, which could see the broader market positive for the day as investors position themselves for earnings season next week.

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