Global equity indices catching up with the dollar

Market Review

Yesterday’s market movement was for the most part contained in the morning and afternoon session. The S&P traded in a tight range between 1981.50 to 1971.50, whilst the EURUSD was contained in two 20 pip ranges – where the first one was broken at 1400GMT when a lift up to R1 and Tuesday’s high as the dollar index saw some weakening through the session ahead of the evenings release of the FOMC statement. There were only limited expectations from the meeting, with the end of QE3 having a unanimous consensus amongst analysts. Where analysts struggle at this point is when the first monetary tightening measure in the shape of a rate increase will happen. With the dove Narayana Kocherlakota being the sole voter wishing to maintain low rates, the Hawkish outlook of the Fed became more apparent than the majority of participants had anticipated. This realisation has led to a widespread USD strength as an earlier rate increase is being priced in. Of the strategies the S&P was perfectly obtained both on entry and first target, although we realise the risk involved trading this at the FOMC release is immense.

Today's Fundamental View

Although the EURUSD has continued to sell off on dollar strength which stems from yesterday’s events, the euro has bounced from the low point as German unemployment improving as well as Spanish GDP being posted in line at +0.5%. Global equity indices has been catching up with the dollar this morning, and the S&P is currently down close to 1%, with the immediate outlook being to the downside. This afternoon there will be a release of the Advanced US GDP reading, the first of three readings which will call the state of the US economy the previous quarter. As this is backward looking data it is unlikely to have a massive immediate effect we are used to from the NFP number, although a good number can be enough to change the sentiment and support the equity market which have started selling on the back of mentioned potential of earlier monetary tightening. Initial jobless claims are expected at 284k; we view this number as positive for the market as long as it remains below the 300k mark, as it will continue to lower the longer term average of this number down to levels potentially not seen since the 1990s. Another reading today below the handle will be the seventh in a row. Although the price of crude have been heading lower the last few months, OPEC has recently revealed they believe the shale boom in the US to halt as the current price level does not offer significant enough yield – and may even cause producers to post a loss on their investment. Due to the long term trend this will however not change our outlook on the product for today. As yesterday we are long equities with a short bias on all other products.

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.