Financial market saturation of geo-political risk news

Market Review

The last two weeks of trading have been rather volatile and provided some nice trading opportunities on the back of geo-political risk, earnings season, as well as continued focus on monetary policy through the labour market and inflation measurements. While US inflation has increased and initially spurred fears of rapid surge higher, the last reading saw the CPI stabilise at the highest level since early 2012. Employment has been heavily discussed throughout the last few years following the global financial meltdown. On Friday, the Non-Farm Payrolls saw its sixth consecutive reading above 200k and now has the highest average since before the crisis. The reading of May was revised up by a few thousand, which meant the payrolls number itself in May was the largest in over half a decade. For this reason the lower than consensus reading on Friday was not a bad reading at all. With the initial weakness in the dollar due to the volatility in the market meant that the EURUSD entry was obtained, and minutes later hit the first target. Similar movement was seen in the US10Y, but this product was more stubborn on the upside and eventually stopped the strategy. Equities were surprisingly non-reactive.

Today's Fundamental View

This morning has seen most markets being caught in a tight range after the above mentioned Non-Farm number released on Friday. The market behaviour is normal for this time of the month, and through the session today one should be very considerate of the conditions it creates and not be too greedy, amid lack of other news. The data calendar is also empty, and we have time and time again seen a financial market saturation of geo-political risk news which means there is even less chance of getting any decent volatility today. This mornings release of UK Construction PMI came out slightly higher than expected, and the average construction output remains relatively high. This did not mean that the British pound went bid, as it has remained in a tight 15 pip range thus far. After last months sell-off in the S&P many analysts have started arguing for a bear market. We are completely opposed to this view at this point, and look at it as market movement – volatility – which one cannot avoid. The April and May high support comes in just below the 1900 handle and should provide a decent buying opportunity for the bulls. Should we sell off further we will re-consider our view, though looking at the monthly chart it would still only be a fraction of the bid we have seen since triple six. With the current dividend yield in the S&P having stabilised at the 1.94% handle the last half year, this will be increasing should we see a larger sell off, which means it will be a lot more attractive as an investment; especially if dividends keep rising to yet another all time high. The current yield differential in bonds and risk assets such as equities have been distorted due to the monetary easing the markets have been through, but this is slowly normalising, at least on the American side; illustrated by US10Y yield being higher than many peripheral European countries.

Alternative View

Comments from Russian officials may halt the extension higher, though this should still lead to USD strength in a risk off move. Monetary policy comments can adversely affect the markets. Please remain aware of all developments coming out of Ukraine, Russian and the Middle East and keep a conservative outlook with regards to risk. Over exposure in markets with such uncertainty is dangerous and should be avoided.