UK jobless falls, unemployment holds steady at 7.2%

Market Review

Market yesterday is currently showing signs of irrational exuberance as it continued to climb ever higher even though there are geopolitical events which should point investors towards safe-haven government bonds, as well as the US dollar. In one note though an argument may be that US equities are somewhat shielded from events in a relatively minor economy, though what should be priced in is a bigger negative effect as sanctions may increase as well as a low risk of military escalation in the region. Now that Ukrainian soldiers have been given a green light to open fire after one of their soldiers were killed and another one injured as one of their military installations was taken over, by what are described as Russian loyal troops, one would believe investors and traders would move more of their positions in to safer assets. As we are trading close to all time highs the potential of a conflict resolution rather than escalation may well be what investors look for and are unwilling not to be in on this bounce. The strategy entries yesterday were not obtained, though the US10Y and crude were relatively close to the entries and we did project the market direction correctly.

Today's Fundamental View

This morning BoE expectedly kept rates at its current levels and voted unanimously to unchanged asset purchases, which did not come as a surprise to any market participants. The level of unemployment is currently at 7.2% which was in line with the expected, though the members of the Monetary Policy Committee is predicting this to fall down to 7% within the next few months, in which it has previously indicated that this is a level at which it may start hiking rates, it has put a caveat on this as the spare capacity and wage growth is not yet at levels which the BoE is satisfied with, and it does not view the current situation as stable and will await further confirmation. Sterling has strengthened on the back of this but has yet to reach Fridays high. As much as we would like to say most traders are purely anticipating the FOMC, the situation in Ukraine has increased in terms of tension in the last few days and we will need to closely monitor it. The S&P is still unwilling to sell off and which may indicate that unless there are significant negative developments we may see at least a range to be upheld or a move up through to the highs of last week before the sell off, and should we get there one may argue that the all time high can act as a magnet and that this level will be tested. For the FOMC today most analysts, including ourselves, are anticipating the rate to be kept unchanged, as will the tapering be kept at $10 bl. Outlook will continue to be “concerned” with some weak data, though the jobs number is likely to play a positive impact as “labour market conditions continue to improve”. Janet Yellen will without any doubt scrap the 6.5% unemployment target in favour of a more qualitative measure which will include inflation, which at present is no where near the 2% target of the Committee. Today’s strategy is relatively neutral, we will reluctantly be aiming to go long in the S&P, going with the trend, and with the current conditions we are looking to go long the EURUSD as well as US10Y. Crude oil will have a short strategy attached to it as it is likely that the inventories are a lot more bearish than the analyst consensus.

Alternative View

Hawkish comments from monetary policy makers may adversely affect the markets.