This morning saw the PBOC cut the Reserve Requirement Ratios for all banks

Fundamental View

Moving into the latter half of yesterday’s US Trading session we saw Crude oil continue its push higher. Throughout the day we witnessed a considerable push higher which allowed stocks to regain a portion of their previous losses on the back of an influx into the energy stock sectors; Exxon Mobil has risen nearly 3% in the wake of the oil pull-back. This has generally been driven by hopes that the US will begin to taper production and continued announcements from firms such as BP cutting capital expenditure and future exploration projects which would continue to increase supply. We also saw developments in the Greek political space. Angela Merkel has signalled that the German government may be more tolerant of the new Greek government and allow the Greeks more time to establish their new parliament. This has been widely received as fairly positive as we see stocks remain relatively buoyant on the news, hampered only by the fall in crude from its highs yesterday. There has also been a meeting between Varoufakis and Draghi and German Finance Minister Schaeuble this week and traders in Europe are taking profit ahead of any further developments in the European political space.

Today’s View

This morning saw The PBOC cut the Reserve Requirement Ratios for all banks, boosting liquidity as market rates have fallen. Stocks initially took this as bullish, attempting to push higher perhaps misinterpreting the PBOC’s move as a move on rates but ultimately the move stagnated after the news was fully digested. We also had Services PMI from European states; Italy, Spain and Germany outperformed but France missed slightly on the headline. The reaction to this data set was muted, stocks instead taking their lead from the decline in crude oil prices. The UK also beat on expectations, allowing GBPUSD to rise as the unwinding dollar trade continued. For the session ahead we have ADP Unemployment for January, expected with a reading of 220k. We also have the US Services PMI and also the DOE U.S. Crude Oil Inventories for this week. The ADP unemployment figure, as a general barometer for Non-Farms on Friday is even more important this month as it is the first reading for 2015; any move outside the expected range could trigger strong movement as traders move to anticipate the Friday release. Caution is recommended around the Employment report in light of this.

Alternative view

Our bullishness on stocks is dependant on continued upside in the price of Crude Oil. If Crude oil fails to drift higher and moves to the downside we recommend traders avoid double-exposure to the same move.