Stocks soft after latest rally on ECB stimulus hopes

Market Review

Yesterday’s session was unique for the S&P. Never before had it traded above the $2000 handle, and yesterday the spot market managed to edge its way up above the psychologically important handle and post a high at $2001.95. The futures market September contract which is the most liquid failed to make it to 2k by 1 tick, posting an all time high at $1999.75. The move up was supported by dovish central bank comments as both Bank of Japan’s Kuroda and the European Central Bank’s Draghi stated the loose monetary policy environment would continue. Many have speculated whether or not the ECB will go ahead with QE or other forms of stimulus, though with current measures in action to ease credit conditions and with yields remaining at record lows, such action is not warranted. There was no strategy issued yesterday as it was a UK bank holiday.

Today's Fundamental View

This morning has seen most markets ranging as there has been no news of note as market participants are awaiting updates on today’s meeting between Russia and Ukraine. Interesting developments this morning as 3 Russian servicemen was captured on the Ukrainian side of the border. The Russian side claims the men were there by mistake and may have gotten lost, whilst the most trusted argument at this point is that they were on a special mission. As this is happening it is worth noting that separatists have attacked a city in eastern Ukraine whilst peace talks between Russia and Ukraine are set to take place. The other event this afternoon that will spur volatility is the Durable Goods Orders. These are set to have an impressive increase of about 7% from last months reading on the back of extraordinary airplane orders made at Boeing for June at 324 planes, three times the amount ordered same month last year. The 7.4% expected can in some circles be viewed as conservative as other estimates suggests a number above 10% and the most optimistic shows a 38% reading which would be over double of the previous record increase of 16.6%. Nevertheless, if the number comes out above 7% this should feed through to a positive day on the S&P, and anything above 10% will pretty much guarantee a close above the 2k handle amid no negative developments in the chats in eastern Europe. Today’s strategy is long equities, with all other assets short.

Alternative View

Miss on headline data may lead to a move down in equities and invalidate our strategy. Any geo-political risk should be carefully analysed and should the talks between Russia and Ukraine come out as not constructive we may see a push higher in black gold.