Bad data could be an indicator of increased chance of QE

Market Review

Friday was extremely slow in terms of market movement and data, following in the footsteps that was made earlier in the week with the only exception in terms of volatility coming in on Wednesday evening in the form of unexpected central bank comments. The most important piece of data on Friday came 7am in the morning London time as the German PPI number was released worse than expected, marking the eight straight reading with a reading lower than market consensus. The reading meant that movement in the euro was straight forward and we witnessed a sell of through the session, though with low volume and a lack of pullbacks catching any meaningful amount of ticks would have been difficult. No strategy entry was obtained as we decided to be risk averse with the entries should there be surprise comments on monetary policy or any meaningful escalation or de-escalation in any of the numerous global conflicts that are currently happening.

Today's Fundamental View

Overnight the HSBC Flash Manufacturing PMI from China saw a better than expected reading at 50.8 versus expectations at 49.7. The reading is the first since December above 50.0 and is a large positive for equity markets as analysts have doubted China will be able to hit its GDP target for the year. As a curveball this morning the manufacturing and services PMI data out of Germany and France were lower than consensus as well as the French number being below 50.0 for the second consecutive month leading to a strong move down in European bourses, most notably the Dax which saw a sharp sell off some 15 minutes before the German number was released, indicating that the number was leaked. The strategy “sell the rumour, buy the fact” worked well here as the index has retraced after the actual number was posted. The number may have been negative, but should the Euro-zone continue along its current path with contracting data we may start seeing an inverse relationship like the one we saw just before the release of QE3, with bad data being an indicator of increased chance of quantitative easing. Our comments on the potential reversal in correlation with data/movement can be seen as a response to an article by De Telegraaf this weekend where ECB’s President Draghi was quoted stating that the central bank may turn to quantitative easing should the mid-term economic outlook deteriorate further. It will take some time for the current easing measures to feed through to data, as well as market participants wanting to trade the relationship and these institutions may embark on equity sales to promote ECB easing. We maintain that this correlation will not change instantly and may take a while (weeks/months) to take effect, assuming the data in the euro-zone remains negative and in a downward trajectory. Also bear in mind this just fuels what the market has already believed and should not be viewed as news. Today’s data from the US is Manufacturing PMI and Existing Home Sales. Although we are bullish on the US market these two pieces of information have a history of missing on the headline number, and we will have cautious entries as a result. Although equities sold off in the morning on the back of worse than expected data and the geo-political macro outlook which may be considered unstable at best, we will go with the trend. The currency pair trade is straight forward and we will continue to sell it. Treasuries are more difficult to gauge, caught between low yields compared to historical levels. Currently we maintain our favour to the buy side as a hedge to the short equities strategy. Crude is likely a buy in today’s session.

Alternative View

Hawkish monetary comment speakers from the Eurozone may adversely affect our strategies.