Market Commentary: Crimea's referendum and FOMC keep financial markets expectant

Investors were pretty much glued to their screens and monitors yesterday, closely following the aftermath of the weekend’s Crimean referendum and the possible repercussions the 96% majority ‘Yes to Russia’ result will have on the global financial markets. However, both credit and equity markets proved their resilience with yields within the Investment Grande and High Yield corporate bond market grinding tighter, and global equity markets rebounding from what can be described as a somewhat turbulent week last week.

Meanwhile, the High Grade Government bond markets, led by the US Treasuries and German Bunds, sold off as US economic data surprised to the upside. Factory production rose by the most in six months, signs that the sector is slowly recovering from the gruesome winter weather conditions that kept economic activity in the region at bay. Companies like Yahoo! Inc. rose as much as 4% yesterday as Chinese e-commerce firm Alibaba Group Holding announced its intention of listing shares in the US.

Of particular importance for the world’s markets today is the beginning of the 2-day long FOMC (Federal Open Market Committee) meeting, the first coincidentally to be chaired by new Federal Reserve President Yellen. Policy makers are expected to, once again, scale back its monthly bond purchases programme by another $10bn, after already having done so in its previous two FOMC meetings to $65bn from $85bn.

US president Barack Obama yesterday announced that the US will be imposing sanctions on 7 top Russian and 4 top Ukrainian government officials, clearly stating that Russia could be faced with more sanctions if it doesn’t re-consider its position on Crimea. 

“Continued Russian military intervention in Ukraine will only deepen Russia’s diplomatic isolation and exact a greater toll on the Russian economy,” Obama said at the White House yesterday. These sanctions, the most recent in confrontations between Russian and the Western world since the end of the cold war, came following consultation from the EU, who also imposed its own set of sanctions.

An asset class which could well benefit from this geo political turmoil are commodities. After having being shunned for the greater part of 2013, speculators and hedge fund managers appear to be poised to take advantage of this turmoil and have turned bullish on gold and commodities such as wheat. Gold is in fact benefiting from the safe-haven bid, with the rally in gold expected to be spurred on by additional sanctions.

Meanwhile, reminiscent to market fears that the global economic recovery might be hampered by bad economic data coming out of China, market sources revealed that a major Chinese developer within the real estate sector having just under $60mn in debt collapsed over the weekend. The company, Zhejiang Xingrun Real Estate Co. has failed to honour its obligations and is unable to repay its creditors which include more than 15 banks.

The company’s major shareholder has been detained but, more important than that, the collapse of the company has fuelled concern that the nation's real estate sector is being put to the test, just two weeks after the first bond default by a Chinese company. Shanghai Chaori Solar Energy Science & Technology Co.’s inability to repay its debt may be the opportune moment for global investors to reassess credit risks and unwarranted excess exposures to such companies.