Fears heightened ahead of US GDP data

Last week’s market action

Yesterday saw, in the end, we saw a bullish session for European stocks with the German Dax up nearly 2% on the day off the news that Tsipras has side-lined Varoufakis. This is potentially an important political change and perhaps indicates that the Greeks are now prepared to make the necessary concessions and fall into line with their European paymasters. So the Grexit risk slightly diminished allowing European stocks to rally and the safe haven Bund to sell off. US stocks were not able to grab onto the coat tales of this move and after a couple of very strong tests of the February all time high at 2117.75, the index gave up and tracked lower into the close despite the pre-earnings bid tone for Apple shares stemming the slide. We now have a strong bearish engulfing pattern on the daily chart confirming our bearish stance. The Dollar continued to come under pressure with the US Services PMI data missing expectations. We are seeing persistent Dollar weakness as traders further price in a dovish Fed statement due tomorrow as a result ofconsistently bad economic data over the six weeks, since the last Fed meeting. T-Notes had a mildly negative day. Our view was that we would see T-Notes rise due to bad data and dovish Fed expectations, but this move got pegged back by the correlated Bund moving sharply lower.

Today’s View

This morning we have seen worse than expected UK Q1 GDP figures. The UK economy grew by +0.3% which was below the +0.5% expected and the lowest growth reading since Q4 2012. This has perhaps just heightened the fears ahead of tomorrow’s US Q1 GDP data release. The US has suffered more FX head winds than the UK and so nervousness has ramped higher ahead of tomorrow’s data. We feel that this will keep the S&P and the US Dollar on the back foot today and so we have a short strategy for the S&P and a long strategy for EUIRSD. We expect T-Notes to make the upward move today that we anticipated yesterday, especially as the Bund has recovered a lot of yesterday’s losses. For crude oil we expect a quiet day ahead of the API oil inventory data tonight and then the DoE inventory data tomorrow. On a technical not, today’s current low at $56.07 is right on the upward trend line of the rally over the last 6 weeks (continuation chart). A break of this trend over the next few days may well see a pullback to the $54 area.