Sharp EURUSD sell off as Ukraine ceasefire is viewed as extremely fragile

Market Review

Last week’[s market movement saw an interesting rebound in cable after starting the week on the back foot after a poll over the weekend supported the ‘Yes’ side of the upcoming referendum. The rest of the week was spent pondering over a potential outcome, and by mid week the sentiment change again as a poll suggested the ‘No’ side was reclaiming the lead. The vote in terms of Sterling is rather straight forward, it will weaken it for the medium term should there be a break up, but in a wider context we need to consider the implications of potential replica breakout of Catalonia in Spain, which is the most prosperous part of the struggling country. In terms of data coming in to the end of last week the consumer sentiment index from the University of Michigan was posting some very decent numbers, in addition to retail sales going up. On both accounts there had been four months with lower than expected results, and one can not deny the correlation between consumers sentiment and the amount of spending they have. In terms of strategies the entry on Nasdaq and the S&P was obtained on Friday, though only the latter was stopped out. Crude oil posted a few ticks profit and so was the EURUSD.

Today's Fundamental View

This morning has seen a sharp sell off in the EURUSD which can be attributed to a number of factors. The first in which being the current ceasefire in Ukraine which should be viewed as extremely fragile. We have already been wrong once in our estimate as we believed it would be over this weekend, as rebels keep shelling various positions in Ukraine but the Ukrainian military so far refusing to return fire. We suspect for the time being there is a heavy regroup on the western side with arms from various NATO countries being transported during the scheduled military exercise with NATO that starts today and is set to last for the next 11 days. We now doubt as the military exercise has started there will be an escalation in the east as it will be unlikely Putin would want to stand head to head with NATO. For that reason we see it quieting down and this should be looked at as an opportunity to wait and buy crude for a longer term hold if it breaks down to the $80 handle. The data we are expecting this afternoon has not been straight forward the last few months and we find it somewhat difficult to argue with positive or negative expectations. Especially Empire State which saw a huge downturn last month will be interesting. The deviation from the Philadelphia number was worrying, though as it differs from the historical movement as well as similar readings from other areas of the country we may see a return to numbers above twenty. Overall we have a good feeling for the data, but with recent data of this sort has not outperformed we will be more neutral to bearish for today’s session. The Chinese factory output grew by the lowest rate in six years which may spur new worries of the country’s overall growth rate, and this should help equities head lower if US data does not perform. Today’s strategy is therefore short across the board with the exception of bonds which we will countertrend.

Alternative View

Any geo-political risk should be carefully analysed, with continued focus on Ukraine. The price of Apple may serve as a key indicator to index movement today.