USD has strengthened in comparison with EUR this week

Market Review

Equity markets continued to find solid ground yesterday, cementing the break back above the 200 DMA on the S&P500. This gains were supported by great financial data sets released from the Eurozone, with German manufacturing as well as services number being either in line or beating on expectations. The relief on this data was significant due to the recent poor German data and the concern that the powerhouse of the block itself was now embroiled in Eurozone woes. The afternoon also helped on the sentiment, with initial jobless claims posting its sixth consecutive week below 300k and its 44th consecutive week below 350k; which illustrates just what state the labour market is in now, compared to six months ago. T-Notes were also on the move breaking briefly below 127.000 joined later in the day by the bund as it tested S1 at 150.10. US earnings reports have also been decent as of late, with some notable exceptions with Coke, IBM and Amazon (down 13%). Caterpillar, whose earnings report is a great view in to economic growth posted stellar earnings yesterday and the shares were up 5% yesterday. Our bullish strategy entries however were unfortunately not reached to enable us to profit from our prediction of the continued recovery of risk.

Today's Fundamental View

This morning has been slow in most assets, and if we assume no breaking news we may have a ranging day and low volume ahead of us. The dollar has strengthened in comparison with the euro this week, and considering current conditions, with potential bond buying from the ECB we see no reason for this rally not to continue for another few hundred pips over the next few weeks. There have been reports today that ebola is weighing on investor sentiment, and although this may become true, at this point in time there are no evidence to this actually being the case. The S&P for example has been trading in a relatively tight range and we find it hard to argue that this is a sell off, and even if it was, at this point its too soon to say it will be due to ebola. The German bund is currently trading higher and is outperforming its US counterpart – illustrating the divergence between Europe and the United States economies. As stated in earlier strategy reports we believe economic conditions and monetary policy measures means the gap will only increase over the next 12-24 months. In the geopolitical sector there is little new to report on, although the Swedish submarine hunt has now been called off with no notable results, illustrating just how difficult it is to locate such a vessel. In Ukraine there has not been any developments as of late. Today’s strategy will go long equities and short all other products, in line with our view earlier in the week.

Alternative View

Traders should remain wary and informed of any geo-political risk events that may develop as the day progresses. If the positive European sentiment continues it may invalidate our short EURUSD strategy.