ECB likely to sit for at least another month to give time to previous policy arrangements

Market Review

By this time yesterday morning we had arguably already gone through some of the most volatile movements of the day as Ukrainian President stated he and his Russian counterpart had successfully negotiated a permanent ceasefire, which minutes later was denied by the Russian Presidents office. A new statement was issued and rebels added to commentary, showing willingness for a ceasefire but showing no committal action. Overall the situation was unclear, but as the price of crude indicated throughout the trading day the developments overall were positive as the increased talks of peace calmed market participants. Data yesterday from the Eurozone were less than positive as the overall services PMI number came out lower than expected and US Factory Orders just missed the headline expectation. Of strategies the S&P entry was obtained but no targets were filled, while Nasdaq was obtained and saw a 30 tick bounce before dropping lower.

Today's Fundamental View

Although tomorrow will see the release of the Non-Farm Payrolls, today is arguably the biggest day of the month. Firstly the Bank of England release which showed unchanged on the rates and continued divergence amongst the MPC members at 1200BST; with the most important event still to come in the shape of ECB rate decision and following press conference. While many participants have been calling out for quantitative easing and ABS purchases, especially in the wake of Draghi’s comments at Jackson Hole late last month, we believe the event today will be far more hawkish. The inflation expectations is likely to be revised down for 2014 and possibly somewhat softer for the first half of next year. We see the central bank being positive on previous policy arrangements, and is likely to sit tight for at least another month to give them time to properly feed through to the market. By implementing further policy measures at this stage and lowering forecast of inflation, we believe this will be admitting that all previous efforts have failed, which ultimately should not have an impact on monetary policy decisions. Should this be the outcome we are likely to see some downside coming in to risk assets, as well as some strength coming in to the euro. Bonds are likely to have less clarity in their move, with this being negative for the price with expectations of QE needing to be priced out. The risk off move has the potential to counteract this move down. For this reason we see the most straight forward trade being in equities. Depending on the sentiment surrounding Apple the Nasdaq short may be the preferred option, though if the Ukrainian crisis continues to go unresolved and without a ceasefire agreement we may see exaggerated moves in the markets the ECB caters to, namely ESTOXX and the DAX. Traders should be aware of a potential peace-agreement which can halt a sell off, and profit targets should be more prudent should the crisis in Ukraine continue. Should we be correct on the central bank policies, and if steps made to ensure peace in the near term across Europe, the most straight forward trade may switch to the German Bund. Crude oil remains risky, and although not the most important asset today we believe a long strategy should be implemented.

Alternative View

ECB being more dovish than what we expect will see most of our strategies being invalid. Headline data worse than expected combined with a withdrawal of Russian troops may lead to a move up. Any geo-political risk should be carefully analysed.