Wage growth component of labour report to get close attention

Market Review

Yesterday’s session was hyped up quite a bit and there were various predictions as to what exactly would be revealed by Mario Draghi. Amplify was more on the hawkish side and did not believe in rate cuts nor any other measures to be delivered this month. On both these accounts we were wrong as the central bank lowered all three interest rates by a meagre 0.1 percent, which can only be said to be for appearance, as the interest rates are already low, however the amount banks have to pay to ECB to deposit funds at the central bank has doubled to -0.2%. During the press conference Draghi revealed the bank will attempt to kick-start the asset backed securities market in Europe back to life by increasing demand. The program will be funded by fresh money, though is not considered quantitative easing as the ECB may sterilize these purchases by taking funds out elsewhere and stimulate banks to keep funds deposited in their accounts, effectively not increasing the monetary base available but easing the credit conditions which may lead to small and medium enterprises having cheaper access to loans. The instant reaction to the rate cuin the euro was heavy weakness, and the EURSUD broke below the 1.30 handle for the first time since July last year. With the current easing measures we did see a divergence between European and US equities yesterday, with the US Non-Manufacturing number at levels only seen a couple of times since the financial crisis kicked off 6 years ago eventually leading the S&P to sell off as speculations on an earlier tightening of monetary policy ramped up.

Today's Fundamental View

Most markets have been quiet this morning after the central bank events yesterday as traders’ attention temporarily has shifted to the labour market in the US and the release of the August 2014 NFP number which is expected at 226k. This summer has seen two readings close to the key 300k handle, though not quite gotten up there. On last reading the unemployment rate increased by 0.1 to 6.2% and this is expected to drop back to 6.1% today. The wage growth component of the labour market report will get close attention as this is what the Fed will be using to try and correctly time the beginning of their tightening cycle. The Ukrainian crisis continues to loom and this morning reports has it that the Ukrainian military has been shelled from positions in Russia. Eyes are currently turning to the city of Maripol as Putin is trying to open up a corridor to his newly acquired Crimea. With people having difficult understanding his logic, there is a simple way to reason: What do you give a man that has everything? More. Considering his history we do not have any problems looking at this from his point of view, and in fact it makes perfect sense. If you want more power and you know that the only group that has any potential of stopping you have stated that they will shell you with arguments rather than artillery, you push forward with your plans. We eagerly anticipate any outcome of the current NATO meeting in Wales, but assume nothing more than sanctions will come from it. Whether a ceasefire is brokered today in Minks or not will be an important influence on markets today – we are sceptical that a ceasefire will be agreed. The price of crude should head higher amid continued unrest. With a better than expected NFP number we will see the EURUSD continue to sell off, and we may see a reversal in equities. US bonds should be on the back foot and see a decent risk on session.

Alternative View

Headline data worse than expected may lead to risk off and equities moving lower. Any geo-political risk should be carefully analysed.