Cable main mover this morning after low UK CPI

Market Review

Yesterday’s session traded on light volume and was an overall non-event due to the lack of tier 1 US data. As the European session also was light, the focus remained on the geo-political tensions around the Globe, with particular emphasis on Ukraine. A positive from this crisis is Vladimir Putin’s dismissive reaction after a Russian military convoy was destroyed upon entering its neighbouring country. The lack of reaction from the Kremlin shows there may not be any further escalation as many feared, and it may be considered a withdrawal of military support to the rebels. As we discussed in the report last week; one of the most important objectives for President Putin was to be able to walk away with his head up high as a liberator of Russian nationals in the region. With such a dismissive reaction he may have started to pave his way out, and can return to Moscow claiming victory in Crimea which the west does not seem to care to much for any longer.

Today's Fundamental View

Cable this morning has been the main mover as the UK had a release of its official CPI numbers; showing a lower than expected reading at 1.6% versus the expected 1.8%. This is also lower than the previous reading at 1.9% and may provide some further downside throughout the session on the back of concerns on interest rate policy. With inflation dropping at its current rate, Mark Carney may think twice before increasing rates. The inflation now stands at its lowest since November 2009, with the lowest during the GFC being at 1.1% the month prior. This morning has subdued in volume save for the aforementioned, and amid no news of note we question the validity of the move higher in risk assets. Looking at the US session only and cutting off all noise from the European session we see a large gap lower in the S&P from the close at 1952.50 to today’s open. Although the gap was not closed on Friday, we believe today’s is of a significant enough size to frighten off some of the bulls. The same gap area was also in play between 30th and 31st July. Please note that the bearish nature of the S&P 500 strategy is due to the technical gap trade, as opposed to the a switch in fundamental view. The trend higher should also not be ignored, though a close of the gap does not invalidate the rally by any means. The CPI expectation at 0.1% is also extremely low; a fulfilment of this should price in a rate hike faster than expected, assuming the trend continues. The USD should also strengthen. For crude oil the geopolitical tensions makes it difficult to validate the sell off we are currently in, though we do our utmost to focus on increased output from oil producing nations. We also note that the various conflicts have not actually affected any of the output in a negative way. Building permits have been stable over the last 18 months, and it would surprise us if the number is not within the 0.9 – 1.1M range. We do not believe this should draw too much focus from market participants as the session goes past 1330BST. We look to Apple stock as the launch date of the much anticipated iPhone 6 comes closer. The share bidding has started and, for the first time since the stock split, the share is close to breaking the $100 handle. This has helped NASDAQ edge higher.

Alternative View

Monetary policy comments can adversely affect the markets. 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.