Eurozone inflation slows to 0.3%

Market Review

Yesterday’s focus was again on the Russian and Ukrainian situation as it escalated after Russian troops crossed the border into Ukraine. Movement in equity indices was initially negative as the Ukrainian President issued a statement that the country was being invaded. This was later retracted and replaced by comments of Russian troops being in the country, which led to some widespread strength in risk assets. Our problem with this is that the underlying situation here is unchanged during the two statements, and any sell off or re-bound was likely to be unwarranted. Data yesterday was good overall, with the US GDP number surprising to the upside on the second reading after an upwards revision to non-residential fixed income. Initial jobless claims showed a continuation of the recent trend and the number was just below the 300k handle. Pending Home Sales were also much better than expectations. The US10Y strategy entry was obtained, though no target was hit. Nasdaq hit both entry and first target. 

Today's Fundamental View

Data this morning revealed the CPI for the Eurozone was more or less in line with expectations, though slightly higher for the core number at 0.9% versus expectations of 0.8%. This led to an initial move up towards the 1.32 handle on euro strength as it gives Mario Draghi less legroom in terms of looser monetary policy. With the latest speculation of imminent stimulus from the ECB we believe this can help halt the rally in bonds which have been positively correlated with risk assets as of late. The potential reversal may still not mean the correlation will change, as the situation in Ukraine is still rather difficult to forecast day by day and, with the weekend approaching, it is difficult to see how traders can justify holding long positions Saturday and Sunday with current tensions. Data this afternoon includes Personal Spending and Income which over the summer we remain very positive on. Recent PMI numbers have been decent and we do not believe this will change. Although the data in theory should lead to a rally in the S&P we believe the situation in Ukraine may overshadow it. It is important to remember that the fundamental developments may not affect bottom lines of the companies in the index , it is the general bias towards risk aversion to holding positions that may lead to the sell off. The strategy today is long on bonds and crude oil, short the EURUSD and the S&P. Similarly to yesterday's strategy report, we are long the NASDAQ in an attempt to hedge our short in the S&P. 

Alternative View

Headline data much better than expected combined with a withdrawal of Russian troops may lead to a move up. Any geo-political risk should be carefully analysed.