Markets positive to the steps taken by the situation in Ukraine

Market Review

Yesterday morning saw UK construction PMI posting its seconds highest number since before the financial crisis. On the face of it this should have created widespread sterling strength, but was overshadowed by a new polling on the Scottish independence referendum set to be held later this month showing an increased amount of participants being in favour of a break up. This has led to a slide in the UK banking sector which also helped weighing on stocks. Despite the afternoon’s much better than expected ISM Manufacturing number the slide in the S&P continued and posted a double bottom for the week, though we saw a small rebound at the end of the session. Crude oil slid 321 ticks high to low as China posted lower than hoped for manufacturing data. Combined with a substantial production increase the last few months we have seen crude come down to areas not seen since the beginning of 2014.

Today's Fundamental View

There has been a decent amount of volatility this morning which stems from several sources; firstly data from Europe which has seen mixed services PMI with most countries missing on the headline with the exception of Spain and the UK. On the face of things this would normally lead to mild risk off, but the Ukrainian President issued a statement saying he has reached an agreement with the Russian President Vladimir Putin on a permanent ceasefire. As equities went bid and the euro prepared for strength ECB’s Liikanen stated the central bank was ready for new measures, leaving the currency in a limbo versus the USD, whilst it was adding to the positive sentiment in equities. It got interesting when Putin’s spokesperson stated Russia could not have agreed to a ceasefire in a situation they are not involved with, whilst at the same time rebels issued a statement both pro and against peace. Overall markets have been positive to the steps taken as it shows that developments have been made. The afternoon is set to be volatile as we await more news in regards to the mentioned situation. In regards to data, Factory Orders are expected at 1500BST and we remain positive on the developments in this sector. Manufacturing data yesterday showed a full recovery from before the crisis in terms of the data set. Factory orders have only missed the headline on 2 occasions this year. Ahead of tomorrow’s ECB meeting we assume more members will use today as an opportunity to get their opinions out. For now consensus is difficult to call, but an increased amount have been calling for quantitative easing in some form. As he stated in Jackson Hole the central bank will use all the available instruments needed in the near-term and we still believe that many analysts have put too much emphasis on “all the available” and left out “needed”. Overall there has been relative price stability in the euro area, and it is in the longer term we are afraid of deflation as one single reading would not be enough to call it instability. Moreover large deviations in CPI, rather than a stable number, may also cause more instability. Today’s strategy is long equities, short EURUSD, long crude, short t-notes.

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.