Focus on whether Yellen speech can help S&P 500 hit 2,000

Market Review

The data calendar yesterday was packed with US data including jobs numbers, manufacturing and housing data. All of the releases beat on the headlines, with initial jobless claims posting a number below 300k for the second time in August and third time this summer, sending a hard message to the Federal Reserve that the labour market is in a stable recovery. The stability of the numbers were also noted in the minutes on Wednesday and noted as one of the parts FOMC members were concerned about in terms of keeping rates low for an extended period. With manufacturing on the mend as well the economy seems fairly resilient to a potential rate hike. The crude oil strategy was obtained and stopped yesterday, with no other entry being hit.

Today's Fundamental View

This morning has seen the S&P in a range with a recent test of the downside of it as Russian aid trucks have been reported to having crossed the Russian border without the Ukrainian military’s approval. It follows that although the red cross flag is featured, the Red Cross has not given its seal of approval on these trucks. Initially Ukraine viewed this as an invasion and this has led to a widespread sharp drive lower risk assets. However, further comments from the Ukraine then indicated that the foreign ministry had in fact given permission for eh Russian convoy to enter the country and the Ukraine will not use any force against the convoy – therefore risk markets have retraced most of the earlier downside. The only event of the day comes from Jackson Hole at 1500BST where Janet Yellen is scheduled to speak. Markets expect Yellen to be more dovish than the FOMC minutes released on Wednesday and given how sensitive markets are to hawkishness, it is unlikely that Yellen will deviate from her usual dovish rhetoric. We expect Yellen to on the one hand point towards a labour market that is recovering faster than the Fed expected but on the other hand highlight the sizeable spare capacity within the labour force and the high level of people taking part-time and low income jobs for economic reasons. Today’s strategy is carefully long at S&P and Nasdaq, with t-notes short and bullish view on the USD. Crude oil saw a spike yesterday, and on the back of the trucks entering Ukraine we will go with the move up.

Alternative View

Miss on headline data may lead to a move down in equities and invalidate our strategy. Any geo-political risk should be carefully analysed.