Sterling strengthened after much better than expected retail sales

Market Review

Yesterday’s market was relatively eventless compared to the previous session, where ECB’s Jens Weidmann was quoted saying “Quantitative Easing is not out of the question” – which has translated into the Bund grinding higher through the session yesterday as well as in a sympathy move bringing the US10Y with it as the ECB signalled there may be more demand for bonds from their side. The data yesterday saw a confirmation of our suspicion that crude oil would see a much bigger build than expected and our 4M more than consensus estimate was confirmed. Crude did fail to make a new low on concerns over Russia, and continued higher despite these numbers. The Durable headline number was much better than expected, however this was purely due to a aircraft big order for Boeing. So after the S&P briefly touched a new high the index then tracked lower after the underlying Durable Goods ex Transportation showed worse than expected figures fro the broader economy. The S&P took a further leg lower into the close after Obama upped the anti on his sanction threats to Russia and also the Fed bank stress tests results showed that five banks, including Citi, do not have sufficient risk controls in place to warrant them increasing dividends.. The strategy entry on US10Y was obtained and stopped yesterday, though no other entries were traded on during the time we deem the strategies valid.

Today's Fundamental View

This morning the biggest move has been seen in the GBPUSD as Sterling has strengthened on the back of much better than expected retail sales numbers which is the third reading this year with a much higher than expected result, bringing the year over year number up substantially. Currently cable has met resistance at R2 and last week’s Thursday’s high. Through today’s session we are expecting longer dated bonds to continue to grind higher, and should the trend continue in the same fashion as yesterday there may be difficult finding pull backs. Overall we are bearish on US treasuries, but this sympathy move has caught our attention properly and we will not go against it for the time being, especially not when the tensions in Ukraine remains and the markets are worried about what more sanctions may be imposed on Russia, who is now poised to post a YOY GDP number at only 0.5% versus the pre-crisis level at 2.5%. Ukraine has currently been bailed out of the crisis financially by the IMF with a package worth $14-18 bln. Of note for the equity market, Citigroup failed the Federal Reserve’s stress tests yesterday as the Fed’s rejected the groups capital plans with deficiencies on revenue projection as well as projected losses under a stress full scenario. An interesting fact about the US to conclude the fundamental review – with recording its most deaths and fewest births since 1998, highlighting that the US may be able to cap the problem of the worlds biggest economy as the population growth has been immense and bigger than any other developed country in recent years. The S&P is currently trading in a range and we are neutral short, long crude with the trend as well as long US10Y and short EURUSD, with the treasury direction being more due to correlation than anything.

Alternative View

Dovish comments from monetary policy makers may adversely affect the markets, as will any developments in Ukraine.