Europe bourses fall ahead of ECB meeting

Market Review

Yesterday’s market started at the bottom of the range for most equity indices with an initial slow grind higher up to the pivot for both the Nasdaq and the S&P. However, as soon as the US session got underway the sellers came in strongly assisted by worse than expected data, although this data was still fairly solid. It was more the fact that it was the first trading day of teh quarter and with Hong Kong and Ukraine geo-political risk, on-going growht concerns for China and the Eurozone meant that asset rotation out of equities seems to be the theme of the week. Crude oil had another very active day yesterday as it hit perfect resistance on the bounce to the 50% Fibonacci level from Tuesday’s sell off, before continuing on with the trend lower in the evening. Treasuries were very well correlated with equities and went bid, whilst the sentiment on American stocks weighted down the dollar. 

Today's Fundamental View

This morning has started with a large sell off in crude oil as a continuation to the mentioned classic entry which worked well in the review section. Market participants have noted that the sell of comes as speculation on Saudi Aramco cut their wholesale prices – and speculations of a price war has now erupted. We believe with this that there are chances for an increased volatility in the commodity for the next couple of months as the current price is unlikely to stick for long, with the last time we saw months of trading at this level being back in 2011 for three months and 2010 as we emerged from the financial crisis. It is worth noting that the Libyan production has increased, making the drop in price two fold. The break of $90.50 this morning was very negative and lead to more than a $2 sell off to almost test $88. This afternoon all eyes will be on Mario Draghi as the ECB will hopefully outline more details about the asset backed securities program, where expectations lie on €200 billion for 12 months. We note that the program is similar to quantitative easing, although due to the shorter term will be considered credit easing rather than full scale QE, a difference in wording orchestrated by Mario Draghi which got the markets ebullient at the time, although at this stage in time it may have been beneficial to call it QE due to the psychological effect this will have alone. Having said this, we are expecting some form of mention surrounding potential QE, although this should not be outlined in any detail as we assume the ECB would want to see out the other programs in play before they commit. With excessive orders last month from Boeing, we assume Factory Orders to be negative this month. Any number here roughly in line is likely to be discounted and ignored. Initial jobless claims should be roughly in line, +/- 20k; and if this happens the market should be content. Today’s strategy is difficult to call as it is all on Draghi which is likely to be full of positivity towards the market outlook; although the difficult part lies within the clash of the downward trend and positive remarks. For this reason the strategy is long on equities, long on bonds, short on the EURUSD and short on crude oil. 

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. Chinese response to protests and escalations needs to be monitored closely. Monetary policy comments from the ECB will carry weight in case Draghi disappoints.