EURUSD tests the 1.26 handle, may soon witness some profit taking

Market Review

Yesterday’s market was dominated by the equity sector. The e-mini S&P and the Nasdaq were very well correlated and bounced from exactly the same area; the low from Thursday and Friday last week. The sell off was partly spurred by the ongoing situation in Hong Kong, where protestors have taken to the streets in the largest uprising since the Tiananmen Square protests of 1989. The Hang Seng index fell by 1.28% yesterday, and will be closely monitored today as the movement continues and protestors refuse to bow down to authorities; demanding free election of leadership in their region. Earlier we have seen the curriculum at schools being changed to make it more Party friendly, and the current uprising has largely been inevitable as the Chinese government tries to fortify the island which formerly was under British rule. To be clear – the risk here is movement spurring over to the mainland. In that case forget the Arab spring, or Ukraine; a potential “Chinese winter” will be far larger. On a different note, data yesterday was neutral to bad, with the pending home sales number being lower than expected and inflation data being posted in line with market expectations. The S&P and US10Y strategies were stopped out, while the Nasdaq strategy was a positive, and as risk reward determines the days P&L, the day was positive for anyone trading the strategy report entries.

Today's Fundamental View

This morning has seen crude oil continuing higher on what may be heightened political uncertainty, as the map of insecurity evolves. From before we have Ukraine, Middle East, South China Sea, but as salt is added to the wound that is global insecurity, there is now growing political uncertainty in the worlds second largest economy which may start tearing on equities if the unrest spreads or get clamped down on in a manner we remember from 1989. Data this AM has seen an increase in German unemployment versus expectations of a negative number. At the other side of the spectrum the retail sales in Europe’s largest economy was mixed, as were Italian unemployment claims and French Consumer Spending. The market movement on the back of it has seen the Euro versus the USD fall further to test the 1.26 handle; now coming close to levels targeted by several hedge funds and we may soon witness some profit taking. The S&P has continued higher alongside with other equities, and the correlations with safe haven bonds have been normal, and the yield is up. This afternoon is slow on data until cash open, where all three major releases for the afternoon will be posted within a 30 minute window. Overall we remain positive on data from the other side of the Atlantic, with the consumer sentiment as the potentially largest positive with the impressive numbers that have been posted recently. With all this, we remain sceptical on the Chinese situation, as well as the looming tension in Ukraine as the biggest caveats for a sell off in risk assets. With no developments, which may be too optimistic today, we are bullish on equities, the dollar as well as crude, and a bearish bias on treasuries.

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 carry weight.