European equities traded lower after settlement talks between banks and authorities

Market Review

Looking back at yesterday’s market if you were not trading it you may be mislead to think the S&P was volatile and created many opportunities, when in fact there were maybe three or four relatively clear entries between 1pm and 3pm. The day was dominated by profit taking as there were no news to take us higher as the data calendar was empty. The safe haven bond market slowly drifted higher on very light volume through the morning and afternoon until it stagnated a hour and a half before the European cash market close. Crude oil saw a 100 tick sell off at the US cash open as news came out that Libya was preparing to increase their exports. In the currency sector there were some USD weakness, although the movement was for the most part extremely muted.  

Today's Fundamental View

The morning started out with an S&P on the back foot as a continuation of yesterday on light news as we are anticipating the earnings season to kick off with Alcoa. European equities have been trading lower due to settlement talks between Commerzbank, Deutsche and the authorities. The move down shows the enormity the market is expecting, and should there be a light settlement in the future we may well see a rebound in the shares. Treasuries have been higher on the session as speculators believe the current move up in inflation and jobs numbers will not be enough to make the Federal Reserve increase interest rates sooner than previously predicted. The move will be in line with our expectations as we were saying last week that unless there is a substantial consistent change in the figures mentioned above there will be no change. It only makes sense, the Fed is looking longer term, and changing their outlook based on two set of numbers that may well be a one off would be inane. If anything the equation should include what will happen to the US economy and the data releases if the winter ahead is as harsh as the one that was? What will then happen to the economy if there is no stimulus and the interest rate hike suddenly comes early spring instead of mid summer? Today’s session is again going to be relatively quiet, but with earnings season ahead there should be plenty of volatility the coming weeks, and we have special interest in how the banking sector is doing as they previously had made some bad predictions on currencies. As a note on sterling, data this morning revealed much lower than previous manufacturing production and industrial production numbers, with downward revisions. The numbers are scary considering the steady track the British economy has been going through lately, though we believe the rally shall continue as the long term trend in data has been outperforming analyst expectations. Although there has been a downtick in risk assets the strategy will continue to favour the upside here as well as the downside for treasuries. The USD has formed a nice downward trend channel and we assume it to hold. Crude oil is the most unpredictable asset here as the risk premium is fading amid no change in output, although there are still risks on potential escalation, as well as predictions that Iraq may not be able to hit its production targets.
 

Alternative View

Bad NFP numbers and/or a hawkish Draghi will lead to significant upside for the EURUSD with the S&P selling off