Cable down 100 pips on fourth consecutive inflation decline

Market Review

Due to Colombus Day in the US, yesterday’s afternoon trading session was relatively lacklustre with most assets moving in a tight range with no news of note being posted. As we headed into the evening risk assets and the USD were getting heavier, and as we had been trading with the 200DMA acting as resistance in conjunction with the Pivot and the 1900 handle, with no willingness to break above this psychologically important line, the move lower was more technical than it was fundamental. Considering the decent job numbers and generally uplifting US data as of late as well as the earnings season that has just started we believe the sell off is a response to the current economic cycle we see at the other side of the pond, as well as the deteriorating environment in Europe. As yesterday was a US Bank Holiday there was no US Strategy for the session.

Today's Fundamental View

This morning is alone making up for the lack of movement during yesterday session. Firstly, Mark Carney is about to have his first challenge as Governor of the Bank of England as inflation with numbers this morning displaying a fourth consecutive monthly decline, indicating Britain is moving away from its longer term target of 2%, which in turns mean the market is currently pricing in that the central bank is now further away from a rate hike than what previously was consensus. Considering the lowered price in crude as Saudi Arabia has partly entered a price war this will further remove inflation pressure. Utility companies have pledged no price hike this winter, which further adds to the downside. Cable is down just about 100 pips on the back of the release. Germany saw the important ZEW Economic Sentiment index being posted at its lowest number since November 2012; followed by comments from the institute that Germany may technically entered recession, and should inflation continue to decline the largest economy in Europe should not continue to oppose to QE. This afternoon has no US data, although earnings reports from Wells Fargo and Johnson and Johnson is set to be posted. Wells Fargo will be the second big bank to report after JP Morgan which reported a decent report this morning, with exception of a miss on EPS due to a $1 bln bill on legal expenses. Revenue and net income are both higher, which sets the stage for other banks to see targets being met through this quarters earnings season. Drawbacks such as legal actions may be seen as individual and should not be a guide for the sector as a whole. Should Wells Fargo beat on expectations we may see a reversal in the S&P, although due to the heavy downtrend and sell off we remain reluctant to trade against this and will be looking for an entry at the 200DMA. The EURUSD has been heavy as well due to poor German numbers as noted above, and we will be shorting the currency pair. In a continued risk off environment US10Y should head higher, whilst crude oil will be trend following. Nasdaq will follow the same path as the S&P.

Alternative View

No news may lead to low volume and adverse market conditions. Monetary policy will be dictated by arbitrary speakers which can alter direction of the market.