Increased speculation on potential QE from the ECB helps European equities

Market Review

Yesterday’s session was very slow due to the US labour day which meant the US equity cash market that normally opens at 1430BST remained closed, which resulted in low volumes throughout the session. The main happening of the session was the UK Manufacturing PMI which surprisingly was released much lower than the expected number at 52.5 which is the lowest since June 2013. The number may mean the BoE will take more time to evaluate the current economic conditions before a potential rate hike. Cable was at a high when the number was posted and immediately sold off down to Friday’s high, before slowly creating a range for itself for the remainder of the session. Other European manufacturing numbers were also posted slightly weaker, but cable was the only pair that saw a noteworthy move. Due to the US market being closed there was no US strategy yesterday.

Today's Fundamental View

This morning data has surprised to the upside with the unemployment change in Spain showing improved conditions. Combined with better than expected UK construction numbers this helped on the bullish sentiment from overnight, where Japan’s employment income rose by an exceptionally high number, showing that Abenomics may continue to bless a country that has been facing stagnation for two decades. The news has helped on European equities especially as there has been increased speculation on potential QE from the ECB at the upcoming meeting this Thursday. As per usual we have had news from Ukraine this morning where Putin in a conversation with the President of the European Commission, José Manuel Barros, was quoted saying his forces could invade Ukraine and hold Kiev in two weeks if that was their intention. Combined with this weekends comments where he for the first time mentioned ‘gas’ and ‘winter’ in the same sentence it is clear that language used by leaders have come to a new level. Merkel also stated that borders in Europe cannot be changed and that sanctions need to be preferred ahead of an economic recovery to ensure political stability in the region. Today’s data comes in the shape of ISM Manufacturing PMI which has posted decent numbers all through summer, and we expect nothing different today. The strategy will be long equities and short bonds. Considering Morgan Stanley have offloaded their long bund position we believe this is more in line with our point of view, and we may see some continued downside ahead of the meeting. The USD should remain on the front foot, while we will be conservative long on crude oil.

Alternative View

Headline data worse than expected combined with a withdrawal of Russian troops may lead to a move up. Any geopolitical risk should be carefully analysed.