Fundamentals continue to leave the door open for loose monetary policy

Market Review

We saw an interesting session yesterday with US earnings continuing the better than expected trend, with the exception JP Morgan’s poor results released last Friday. The data yesterday was good overall, starting with in-line UK CPI numbers, mixed ZEW numbers and in to the US session saw higher CPI. The trend of better data makes life easier for the Fed, with lower than expected inflation the Fed being would be under pressure to keep loose MP for longer, until they saw prices increasing. Deflation would potentially deteriorate the economy at a rate that could severely damage more then a small amount of inflation. The decent number was offset by a much worse Empire State Manufacturing number which helped the EURUSD weaken down to our entry point at the pivot which yielded some 27 ticks, but left our first target unfilled. The US10Y also obtained the entry, but similarly to the previous session we failed to take any profit from it as a result of a lack of direction and exited the trade at scratch after moving the stop to the entry.

Today's Fundamental View

With CPI numbers being released this morning from Europe, we see further signs of price growth heading south as the core number y/y is contracting. This means the underlying fundamentals continue to leave the door open for loose MP in the Eurozone. Developments in Ukraine have seen troops defecting to Russia on a small scale only, however any escalation here could still create a major shift in power in the Eastern block as a worst case scenario. The Ukrainian Defence Minister announced he’s traveling to Krematorsk to clarify the situation. Data this afternoon includes US building permits which we expect to have increased ahead of the summer continuing the trend of growth shown last month, we are bullish enough to predict the biggest number since 2009, breaking the high of last year. One of the more interesting numbers today will be crude, which is expected to see a mere 1.3M build – in conflict with API numbers last night which showed a significant build and a higher number than the expected DOE on all of the components. For this reason we will countertrend today’s market movement which is in a very clear uptrend due to the Ukrainian crisis and go short. This is high risk, but should our prediction be proven correct there is definitely some scope for a downside move. Overall, we are bullish on the session for equities as Google is expected to release their earnings after close, and with all the recent purchases and takeovers we see positive notes amongst the numbers to be released, although we do believe their share value already prices this in. The EURUSD is likely to remain underweight given today’s lower than expected CPI numbers and we believe the US10Y also trade lower on positive risk sentiment which has been supported by the better than expected Chinese GDP numbers released overnight.

Alternative View

Traders should remain vigilant to unexpected comments from central bankers or significant developments in Ukraine that would jeopardise the above view.