Slight overreaction in the selling pressure from the markets

Market Review

Yesterday’s session was one of the most interesting sessions we have seen the last few months, and arguably also the whole year in some products. US10Y treasuries saw, according to Deutsche Bank, the largest intraday move in the 300 year history of United States government debt in percentage terms. To paint an even clearer picture, these 300 years encapsulates the Great Depression, 1 st and 2 nd World War as well as the turbulence we saw through the most recent global financial crisis where quantitative easing have been initiated by the Federal Reserve. Other assets were also moving; the S&P was down 66 points from the high of the day at the lowest, but rebounded exactly 50 points in the late evening of trading. In the currency space the EURUSD moved some 263 pips from low to the high. The movement yesterday was on the back of poor data from both Europe and the US; with the addition of Federal Reserves Williams speculating on a QE4 program. It is important to note that he is a non-voting member of the FOMC in 2014, but will have the vote next year, and he is known for a neutral stance. The crude oil strategy hit entry and 1 st target for a 132 tick profit, though the EURUSD strategy was stopped out for a small loss.

Today's Fundamental View

2014 is sure an interesting year for traders; it will be remembered as the year of tapering and the end of QE3, the year we broke 2000 in the S&P, the year the first woman in history takes the helm of the most important central bank in the world. At this point we may still make new headlines as the infamous term “Grexit” which was headlining the FT and WSJ every day for months back in 2012, may actually happen. Out of the blue the peripheral country is back in the newspapers as they hope to exit the bailout program they are currently a part of in December, with investors not taking any of it, showing their disconcert by selling off their holding off Greek bonds which now trade above 9%. Other peripheral countries have also been feeling the heat with Spanish, Portuguese and Italian yields getting a proper lift from the summer lows as Germany may enter the above mentioned recession; and data continue to disappoint. It is important to note that the sentiment will rapidly shift, and equities will again reach the highs if the ECB on its next meeting become a lot more dovish and mention QE as a very realistic and imminent measure. At this point we feel there is a slight overreaction in the markets in terms of selling pressure as the earnings season remains stellar. As of late this morning Phillip Morris released EPS up close to 7.5% and revenue higher than expected. Considering decent data from the US we believe participants may wake up to the realisation that the dispersion between Europe and the US needs to become greater and that yield differentials in both equities and bonds needs to be higher to illustrate this fact. In stock specific news Warren Buffett have cut his Tesco stake to below 3% from just about 4% this summer after admitting his investment in the company was “a huge mistake”. Last nights API numbers were released at a staggering 10 million barrels. Compared to the DOE numbers this afternoon we see an 8 million difference and remain bearish on the commodity, with a target of the 80 handle to properly break. The strategy will be following the trends in bonds and equities, whilst the EURUSD strategy will be short.

Alternative View

Monetary policy will be dictated by arbitrary speakers which can alter the direction of the market.