The bank's global research team said it believes the Ukrainian crisis threatens to weigh on financial markets if there is further deterioration in the security situation in eastern Ukraine and new Western sanctions on Russia. The bank added that it views escalation of the crisis as likely at this point.
BAML said there is an increasing probability of “negative spillovers” from the crisis impacting Europe. Europe is exposed to Russia through energy, trade and financial channels. Russian asset prices have taken a hit, the banks notes, and the consensus is souring on Russia.
Energy is the most important “contagion channel” the bank says because Russia supplies 75% of the EU’s energy imports, and 80% of exported Russian gas to the EU flows through Ukraine. Germany would be hardest hit by escalation of the crisis among the large Eurozone economies, the bank says. It also notes that Russian retaliation to further sanctions could further hurt European economies.
In BAML’s view the Euro area needs stimulative policies to counteract this and other headwinds however both monetary and fiscal policies remain too tight, leaving the Eurozone dependent of the rest of the world for its return to healthy growth levels. Continuing low inflation is not helping the continent tackle its still rising public debt levels, the bank notes.
In the UK the outlook continues to be positive with the bank expecting a “robust” GDP gain of 0.7% for the quarter of 2014. One area to watch closely the BAML says, is the pricing in of uncertainties around the future path of interest rates.
The Bank of England’s’ promised “limited and gradual" rate increases are by no means guaranteed, BAML says, due chiefly to its coupling of interest rates with unemployment levels and the uncertainty around these unemployment numbers in the future.
In the United States the principle concern identified by BAML is the continued lack of balance in US trade. BAML said that as domestic demand increases recent improvements in the trade balance could fade away leaving net trade exerting a drag on growth in the world’s largest economy.
Looking to Asia, and inflation rose to 2.7% in Japan this month, the highest it has been since 1992. According to BAML one key to Abenomics succeeding is corporate earnings growth leading to wage growth, and the bank is optimistic on the prospects of this happening. In fact it has already started, with the Japanese Trade Union Confederation reporting that as of 14 April, the average wage rise secured across the workers it measured for was 2.19%.
