Europe soft as Ukraine tensions linge

Market Review

Yesterday the market volatility in the S&P slowed down and saw a break in the sell off which had been in place since Friday and had a small bullish bid tone going through it. On the strategy we favoured the downside as the situation in Ukraine escalated over the weekend with separatists taking over key government buildings in the eastern part of the country, in line with expectations. The situation was relatively stable yesterday in the sense that we saw no Russian troop movement, though the similarities in strategy and weaponry used between Crimea and further north leads many to draw a conclusion they are all hired or incentivised by Russia. The initial bid tone was successfully capped at the entry and hit our first target. The US10Y hit the entry and went 50% onside before taking us out at scratch. Monetary policy expectations became anchored to our view as the data for the session was released better than expected, and the business inventories number showed businesses held lower inventories analyst consensus, which may mean the consumers may have had an increase in demand, showing the underlying economy is having better growth conditions. 

Today's Fundamental View

This morning there have been a massive release of UK data – though the only number we are really interested in is the CPI number, which was posted in line with expectations though 0.1% lower than the previous number. After the knee-jerk reaction lower we saw a spike higher towards the pivot and trend from Thursday last week where it has been capped so far. We assume it to continue to strengthen and break this trend as the UK economy is still doing very well. The ZEW number out of Germany was, as per usual, leaked early and the worse than expected number created a bounce rather than fall. We suggested a sell at the low from yesterday in the EURUSD to our traders on the floor that remain bearish as this should weaken the euro. Currently this level is upheld, though the report entry will be slightly more risk averse. We are expecting a lot of data from the United States today, including inflation data. It has steadily been at a very low level, and if it does not pick up we may see the USD weaken as a rate hike or monetary tightening may not be warranted if it can spur deflation and further pressure in this direction. Empire State Manufacturing should provide a steady number and may help offset any weakness in the CPI, only to create a neutral trading ground where the market is range-bound: We believe that this number will beat expectations. The S&P has been extremely lacklustre this morning as some traders have taken an early Easter holiday break and in their absence the volume has disappeared. The strategy today will be cautious long S&P as the earnings season have been average with a slight disappointment on the penalty-dented JP Morgan. We see this to continue through today’s session as well as with decent data overall. USD should strengthen and with the data from Germany we also see some weakening in the Euro, making it the most straight forward trade today. Bonds should henceforth move to the downside, although we are bullish on crude oil in case of further escalation in Ukraine. 

Alternative View

Adverse comments from central bankers may adversely affect the markets, as will any developments in Ukraine.