Market movement should not be contained after CPI data

Market Review

Yesterday’s equity market movement was for the most part largely contained within a relatively tight range which had a bearish pretext. The movement was steered by data in the afternoon where US PPI was largely in line with expectations, though the main headline number was 0.1% lower than what the market had priced in. The market sentiment was changed dramatically as market participants picked up news on stimulus from the Peoples Bank of China in the form of providing CNY 500bln via a short term liquidity facility which effectively means that banks will be more solvent and creates more liquidity in the market. We believe it comes instead of a drop in the reserve requirement ratio as this will allow the rate to stay at its current level which means the central bank will continue to have space to manoeuvre should there be need for it. The lift in stocks was seen across the board, also in the EURUSD currency pair as the European economy felt the potential gains from looser monetary policy in China. Bonds were largely unmoved on the back of the news.

Today's Fundamental View

This morning the market have again been ranging on low volume, although due to yesterday’s stimulus the bias for the range has been to the upside, and traders are more looking for a break of the upside rather than the downside. With today’s CPI data market movement should not be contained for the afternoon session; as the number has the potential of altering people’s expectations of future rate hikes, which we will receive more indications on in tonight's Federal Reserve minutes. The key words to look out for are “considerable period”; with regards to when the Federal Reserve is likely to raise their rates. If the words do not show, during the statement this is an indication that the rates will be hiked sooner than previously thought and we can see some considerable downside movement in T-Notes and USD. The movement in the S&P may turn bearish, though the market is more relaxed now in terms of rate hike than what it have been at any point earlier this year. In terms of Crude Oil the situation in Ukraine has not escalated yet, and it seems more and more likely that ISIS will be fought back in one way or another by a coalition of countries. For this reason we would normally be bearish, though potential increased demand from China puts a hold on this and we are instead looking for pull backs. Tomorrow’s referendum in Scotland is likely to have a central part of the news picture, and any polls released that has the ‘Yes’ side in pole position should be carefully reviewed. Today’s strategy is long equities and crude oil, with a bearish bias on bonds and dollar denominated currencies.

Alternative View

Any geo-political risk should be carefully analysed, with continued focus on Ukraine as well as US data being a key catalyst for movement today. Monetary policy comments from the US will have the market jumping as we prepare for tonight's minutes.