Market overreacting to negative Italian GDP data, equities at multi-month lows

Market Review

We had big expectations of yesterday’s session due to the notable data we were receiving from the US in the form of Factory Orders and ISM Non-Manufacturing. As both posted much better than expected results at multi-year highs we were surprised to see the lacklustre movement equities had on the back of it. Traders were left dissatisfied with the 8 point rebound as many expected a more violent reaction given the descent from the all time highs last Thursday and Friday. Combined with strength in the USD it has been proven that the strength in the current sell off has been stronger than what we anticipated. The sell off in the evening was largely attributed to the troop deployments from Russia on the Ukrainian borders, as well as retaliation efforts by Russia on the back of the recent sanctions imposed on the country by the west. The strategy entry in the S&P was obtained and depending on where the trader took it off hit 1 st target. The crude oil strategy assuming strength on the back of geo-political issues and a bid tone was stopped out not long after the entry was secured.

Today's Fundamental View

This morning equities have been reacting to weaker than expected European data, and herein lies a Italian GDP number which shows a negative growth rate of -0.2%, which is second quarter in a row the economy is posting a number below 0%. This means the country is officially in a recession, assuming no upward revision to this on the next reading. Unsurprisingly this has lead Italian 10Y to sell off; though it is worth noting that only 5 days ago the yield was a record lows. Considering the miss on the headline was by the same amount as last month, and that the February reading was the only positive since December 2011 and has more or less been in a recession since the month after, there is no way the market can be too surprised, and it is possible there has been an overreaction here as we see equities at multi-month lows. A reaction we can agree with however is with bonds as this increases the chances of Draghi being dovish on Thursday, which means traders are positioning themselves for a bid on the conference. If this is true however, we should see a reversal in equities, and the EURUSD may have one of the easiest trades of the session. The Russian situation with troop build-ups and potential countermeasures towards the west may see an influx of funds in to safe assets, also positive for bonds and the USD, and we reiterate that these two assets are very straight forward through the afternoon, with risk being associated with the S&P and Nasdaq, as well as crude. In regards to the commodity, API headline last night was negative five million barrels, and with this we are very bullish on it through the afternoon.

Alternative View

Comments from Russian officials may halt the extension higher, though this should still lead to USD strength in a risk off move. Please remain aware of all developments coming out of Ukraine, Russia and the Middle East and keep a conservative outlook with regards to risk.