Quiet, low-volume session prior to NFP

Market Review

Initially yesterday morning was slow for most assets and the directions were hence forth sideways. Data in the morning was for the most part positive, with Spanish unemployment change showing a number closer to zero than expected. The Construction PMI out of the UK was also fairly positive, and beat on market expectations. In the main though traders were uncommitted while waiting for Mario Draghi and the ECB press conference. While participants were hoping for a dovish ECB President, we had a 'less dovish than expected' tone outlined – although our belief was that there would be a positive spin in his language which would at the very least convince market participants to not sell risk assets. The outcome was relatively clear; the ECB will have a two year (not one as previously thought) ABS program, which in itself is positive, but diminishes the need for full scale quantitative easing, which has been priced in more seriously over recent weeks. The equity sell of that came can be seen in direct relation to this. The US initial jobless claims went largely under the radar yesterday with its third reading under 300k in a row.

Today's Fundamental View

As per usual with Non-Farm Fridays the market is quiet this morning, especially considering Germany is celebrating Tag der Deutschen Einheit; or Reunification Day as makes more sense for our non-German readers. This has lead to an even lower volume than what is normal, and until the release of payrolls data this afternoon we do not see much happening. The euro has weakened in a subdued manner this morning, with Spanish and Italian services PMI both being weaker than expected. A market that has seen some more movement is Cable, where the currency pair is down almost 100 pips as Goldman’s speculated that the pace of rate hikes from the BoE will be slower than that of the Fed. For the afternoon one should note that the initial jobless claims number yesterday was the third reading below 300k, which is the first time since 2006, and before this we would need to go back to the year 2000 before we find an equivalent row of numbers. The continuing claims were also decent and is down at a six year low. In conjunction with consistent Non-Farm data latterly (arguably last month was an exception) we see no reason to be negative on the prospects of this number. A reading mid 200’s should not be ruled out. The ADP on Wednesday was at 213k, so this may again be very optimistic. The Hong Kong protests are continuing, and the current leader of the city has refused to step down. As the police are preparing rubber bullets and other riot gear we expect a clash this weekend; especially if the riots takes to physically occupy government buildings which is has threatened to do. Although, there are rumours of a meeting between the two sides and we still have not seen evidence of the democracy movement spreading to other parts of China. Today’s strategy will be long equities, a strategy which has been questionable for large parts of this week, as well as short bonds and the EURUSD. Crude oil will switch to a short strategy on the back of USD behaviour amid expectations of a bullish payrolls number. The commodity is tough to gauge movement of at the moment as it is stuck between supply and geopolitical uncertainty.

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.