GBPUSD pulled back from post-weak-UK-inflation lows

Fundamental View

Yesterday we saw a great uptick in volume on day with a very Spartan calendar. With no tier 1 data releases of note we had consigned ourselves to a quiet Non-Farm-Monday with little in the way of volume trading. However the leg lower in oil allowed stocks to gain momentum, the risk trade taking hold as T-notes moved to new highs off of the negative correlation. The surprise moves in the markets were most prevalent in the DAX, trading higher by 1.38% by days end but moving a total of over 400 prices over the trading day. This was clear outperformance in European bourses as the S&P struggled to retrace any of its losses until the close of US trade, grinding higher with little gusto. We saw broadbased risk aversion overnight as oil drifted lower, now down 54% from its highs back in June and falling 24% in the last 11 days alone. This stemmed from a cut to average forecast from Goldman Sachs and triggered the sell-off in global equities. Energy stocks led the way with exon Mobil down 1.92% on the session and Chevron Corp down 2.15%. The dollar weakened on interpretation of weaker than expected wage growth from the Friday release and this allowed the EURUSD to pare some of its losses seen over the past few sessions in a consolidation move back above 1.1800. Overall we have seen less emphasis on Greek risk but we are still likely to see the first wave of corporate defaults on the back of the fall in oil prices. As we see a low number of operating rigs in North Dakota a further sector to be hit could be the energy services sector; engineering firms such as Petrofac have been on the back foot and with large cutbacks in services due to rig operations falling sharply, coupled with short positions taken up by large players such as Marshal Wace we could see further downside in this sector.

Today’s View

This morning we saw UK CPI numbers come in below expectations on the headline with a reading of 0.5%. This was coupled, however, with an in-line core reading, resulting in a muted reaction to mixed data. GBPUSD moved lower off of the headline figure by 32 pips, sterling weakness being the most obvious reaction to the number but traders swiftly reassessed the situation and allowed GBPUSD to pull back from the lows. Ahead we have relatively low key data with only Chain-stores to keep traders busy. We are expecting the majority of correlations to hold with crude pushing lower on the back of poor overnight Chinese data. With Chinese data at lows it is expected that demand for oil will continue to slide, allowing prices to decline further. This will most likely have a similar effect on equities with energy stocks leading the way downwards. The dollar is mainly on the front foot today against the Euro, testing the technical support at 1.1790, with some slight risk off sentiment creeping back in on the back of any potential default risk.