Central bank policies keeping a lid on the volatility

Market Review

Last week saw a mountain of events hitting the market. On Tuesday, Janet Yellen’s relatively hawkish stance on the market continued as she continued to favour jobs growth and inflation as two key indicators to look at for monetary tightening. The market has started to price in a higher probability that this may happen before mid summer 2014, and this has led to some widespread USD strength. With the plane crash event late last week we saw a spike in gold, but unless there is an escalation of tension and unrest within both Ukraine and the Middle East we will not assume this will continue as any movement in the area will not have an actual influence on large cap company stock, from which we expect to see a continuation in positive results. Equity markets continue to edge higher however despite the potential for escalation and we believe that ultimately eyes are still on central bank activity as the key driver for asset price valuation. Any short play should be concentrated in EU indices in the absence of ECB action given the deluge of US earnings we have this week.

Today's Fundamental View

Over the weekend several pieces of evidence have emerged in the case surrounding the flight MH17 shot down over Ukraine, and at this point we have little to no doubt that it was rebels supported by Russia that made the fatal mistake that led to the tragic event with almost 300 civilian deaths. It is important to note that, officially, this will be a disputed subject from the Russian side. The market movement behind should be a sell off as this is increased risk, but as discussed above, central bank policies are currently keeping a lid on the volatility and making sure the stage is too crowded for traders to take any noteworthy positions based on the happenings, though European equities have been on the back foot during the early hours of today’s trading. The day will be news driven rather than data driven as the calendar is empty. Of large cap stocks to report today we have Halliburton at 12:00BST as the most important, and as it is likely it will drive the sentiment surrounding energy stocks and may therefore dictate today’s direction amid no more news regarding the eastern European situation. Today’s strategy will continue with a bullish equity outlook, looking for USD strength across the currency pairs, a down move in treasuries and a bullish move in crude.
 

Alternative View

Comments from Russian officials may halt the move up, though this should still lead to USD strength in a risk off move. Please remain aware of all developments coming out of Ukraine, Russian and the Middle East and keep a conservative outlook with regards to risk. Over exposure in markets with such uncertainty is dangerous and should be avoided.