Divergence between US and Europe will continue to drive valuations

Fundamental View

Job growth in the US economy is back with a vengeance. Friday’s print of +321K was the highest NFP headline since January 2012 and was far above general consensus of +225K. At the beginning of last week we saw comments from Dudley and Weidmann that seemed to be singing from the same song sheet, an interest rate rise in the US may be needed sooner than expected in the United States, perhaps they knew what was coming. The picture in Europe could of course not be more different, and we believe that despite the initial hawkish tone on Thursday from the ECB, QE will be delivered in the first quarter of 2015 and the euro will continue to weaken, and European bonds continue to strengthen. So far this morning the divergence between German and US government bonds has been evident, with Bunds supported by concern over European banks and the continued lack of progress over Greece...again. The Euro has also weakened against the pound this morning,currently testing the low set on Friday.

Today’s View

With nothing of significance on the data front today the main theme will be of continued USD strength and expectations of future FED communiqué. We expect the divergence between the US and Europe to continue to drive valuations. Our USD strength view is shown on all our entries apart from oil where we Based on USD strength our strategy for today will believe in the short term traders may find prices at these valuations attractive. We advise traders that the volatility seen over Thursday and Friday is not set to continue today and therefore trade the light volume conditions accordingly with reduced exposure and limited profit expectations. The only event od note this afternoon will be at 17.30 as Fed’s Lockhart (non-voter Dove) speaks on monetary policy in Atlanta, lets see if he sings the same song as Dudley and Weidmann.

Alternative View

We do expect to hear, at some point, more dovish tones from the ECB, although non are scheduled. Such comments however would support European equities and nullify our short entry on US equity indices.