USD should continue to strengthen

Market Review

A very quiet session yesterday with no macroeconomic data of note except for oil inventories. Most assets iwere n a tight range or in some cases, very quietly, drift either higher or lower. The biggest mover was crude, which had the Department of Energy posting its weekly numbers at -2.1 million barrels: this was slightly more bearish than the expectation and, although the movement was initially muted, there was a sharp sell off some 30 minutes after the release, helped along by easing of tensions in Ukraine. German bunds continue to trade at record levels and have been supported again this morning.

Today's Fundamental View

The market this morning has been on the back foot as the Russian military has engaged in open conflict on the Ukrainian side of the border after separatists supported by Moscow was on the verge of full collapse. This latest development should come as no surprise as Vladimir Putin knows western nations are not interested in any conflict. Looking at this from a Russian perspective it will allow Russia access to more land and power at very low cost with little risk of open conflict with the rest of Europe. Although this would have been highly unlikely during the Bush administration, President Obama and his European counterparts revealed their strategy when they stated there would be no allowance for military support for Ukraine. Witness reports have stated major military convoys are nearing the borders of Ukraine in addition to the forces already stationed there, making us believe there will be another annexation within the next 7 days as Russia has significantly more firepower than Ukraine. Considering the psychological trauma for Ukrainian soldiers, we believe there are possibilities for mass defections on a larger scale than what we have previously seen. On a different note, the Initial Jobless Claims number, which has been steadily around 300k for the past few months, is set for a similar number this week. Any number up to 310k or even 320k should be looked at as a steady progression and good for the long term average in terms of claims. In terms of pending home sales the number was below expectations last month; overall housing data has improved, with both building permits and housing starts up against previous months. The strategy today will emphasise the Russian invasion of Ukraine, which although may not have a direct impact on the S&P, may cause the index to fall, in correlation with European Bourses and we are therefore bearish on the index. The USD should continue to strengthen, and due to risk off moves the US10Y will move higher, as will crude. To take advantage of the possibility of good data we are expecting, we are long the Nasdaq which means that there is a possibility for both Nasdaq and the EURSUD to hit targets.

Alternative View

Headline data much better than expected combined with a withdrawal of Russian troops may lead to a move up. Any geo-political risk should be carefully analysed.