10 Things You Need To Know Before The Opening Bell, Tuesday, March 18, 2014

10 Things Before Opening Bell

March 18, 2014

Good morning. Here's what you need to know.

Putin to annex Crimea. Russian President Vladimir Putin told the Russian parliament Tuesday that the country would move forward on plans to annex Crimea, the Ukrainian region home to many ethnic Russians that ostensibly declared independence from Ukraine over the weekend in a disputed referendum. The move is sure to draw further ire from Western leaders and the broader international community and will likely be met with increasing sanctions and rhetoric in the coming days, which strategists say could cast a shadow over global risk appetite.

February inflation data. Monthly consumer prices data are released by the U.S. Bureau of Labor Statistics at 8:30 AM ET. Market economists predict the consumer price index rose 0.1% in February, matching January's pace, but was up only 1.2% from a year earlier, down from 1.6% in January. Prices excluding food and energy are also expected to have risen 0.1% in February, matching January's pace, and the year-over-year core inflation rate is expected to remain unchanged at 1.6%. Many trades are benefiting from continued low inflation and status quo monetary policy, so any surprise in these data points in the next few months has the potential to alter the market landscape.

Markets are quiet. S&P 500 futures and U.S. Treasury futures are little changed, and the U.S. dollar is flat against the euro and the Japanese yen. European stock indices are down slightly, while most Asian indices advanced overnight.

More cracks in China. Chinese property stocks fell Tuesday after Zhejiang Xingrun Real Estate became the latest Chinese corporate to face a potential default on its debt. Meanwhile, official data revealed a slowdown in house price growth to just 0.2% from the previous month in February, marking the slowest pace since October 2012. At the same time, the breadth of price gains in the housing market is beginning to deteriorate — prices were up in only 57 of the 70 Chinese cities tracked in February, down from 62 in January.

China foreign direct investment. Foreign direct investment in China rose 4.1% from a year earlier in February, marking a sharp slowdown following January's 16.1% year-over-year advance. The data were said to be distorted by the Lunar New Year period, as many other January and February economic data releases out of China have been. Over the combined January-February period, foreign direct investment was up 10.4% from a year earlier.

Euro zone trade. The euro zone trade surplus shrank to €900 million in January from €13.8 billion in December, falling well short of economists' consensus forecast for a €12 billion surplus. The number still compares favorably with January 2013, when the euro zone recorded a €5.4 billion deficit. Export growth slowed to 1% in January from 4% in December, while imports fell 3% in January after rising 1% in December.

German ZEW. The German ZEW survey of investor confidence saw its economic sentiment index tumble to 46.6 in March from 55.7 in February, erasing all of its gains since August. Economists expected a smaller moderation to 52. The survey's current situation index, however, rose to 51.3 from February's 50 reading, but failed to reach consensus estimates for a rise to 52.

Karlsruhe clears ESM. Germany's constitutional court ruled that the European Stability Mechanism — the euro zone's permanent bailout fund — did not breach the German constitution. "Despite the liabilities assumed, the budgetary autonomy of the German Bundestag is sufficiently safeguarded," said Andreas Vosskuhle, the court's president. "However, arrangements under budgetary law must be made to ensure that possible capital calls pursuant to the ESM Treaty can be met fully and in time within the agreed-upon upper limits, so that a suspension of Germany's voting rights in the ESM bodies is reliably excluded."

Housing starts and building permits. Monthly U.S. housing starts and building permits data are released at 8:30 AM ET. Economists predict starts rose 3.4% in February to 910,000 units at a seasonally-adjusted annualized pace following a 16% slide to 880,000 in January. Permits are expected to have risen 1.6% to 960,000 units at a seasonally-adjusted annualized pace after falling 4.6% to 945,000 in January.

TICS. The U.S. Treasury will release monthly TICS data at 9 AM ET. The report will show data on capital flows in January and provide updated information on international holders of U.S. Treasury securities, and could be interesting given the drop in Fed custody holdings observed since the Fed began tapering as foreign central banks have liquidated reserves in order to prop up falling currencies.

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Below is a Q&A with Martin Enlund, a senior fixed income and foreign exchange strategist at Handelsbanken Capital Markets.

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BUSINESS INSIDER: What is the most exciting trade out there right now, in your opinion?

MARTIN ENLUND: As a Scandi-focused strategist, I like flattening the SEK money market (FRA) curve outright, or vs. Euribor, or why not buying SGBs vs. e.g. Bobls — Swedish bonds are cheap given the Riksbank's clear attention to short-term inflation.

BI: What has contributed most to the euro's rise over the last two years, and what are the key factors driving its current strength?

ME: I think one of the key drivers have been, and still is, private and official accounts reallocating into Europe (and partly out of EM). With the consensus still widely convinced of a "no-growth, no-inflation and no-rate Europe," this process has further to go.

BI: Which developments in global financial markets, if any, would you flag as most concerning for risk appetite?

ME: Aside from the obvious candidate of geopolitics, I think signs of U.S. inflation in conjunction with a Federal Reserve not accepting an overshoot of inflation would be bad news indeed. Such an outcome would more or less put the Greenspan/Bernanke/Yellen put on hiatus. I do not see that happening just yet though.

BI: What do you perceive to be the most misunderstood trend or event in or characteristic of today's markets?

ME: The nature and effects of Fed QE. Tapering is tightening. I overall believe the Fed's road toward monetary policy normalisation will be a fairly tumultuous one, given that more or less no one, including Bernanke himself, is quite sure how QE works — if it works at all.

BI: What pieces of new information (e.g. economic data releases, FOMC, price action in a given market over the next few days/weeks, etc.) do you think have the biggest potential to alter your outlook?

ME: The FOMC decision is key — see above. I'm not at all worried about the $10 billion tapering with regards to rates or the G10 FX space. However, a not-soft-enough statement should mean markets will have to increasingly price in an end to cheap money, which is likely to have broad and negative consequences for all things risky — headwinds for both PE ratios as well as the credit space.

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