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03/09/2014: Outlook ahead of the US session

Equity investors view conflicting reports over a ceasefire in Ukraine with the glass half full

The big news during the European session has been concerning the apparent ceasefire in the conflict in eastern Ukraine. Initial reports from the Ukrainian side suggested that President Poroshenko have come to an agreement with Russian President Putin which would lead to an end to the conflict with the pro-separatists. Cue a sharp market rally, with the DAX and the CAC at the forefront of the move. However this news was then denied by the Russians who claimed that this was not the case. Equity markets spiked higher and then lower, but retain a bullish bias this morning.

Forex markets have been a little more settled, with some of the dollar gains being retraced. However, there is little to suggest there will be any longevity in the move and this is still likely to be a move that just takes some of the froth out of the recent dollar strength.

Economic data has been split between the disappointment of the services PMIs from the Eurozone, coming whilst the UK continues to perform well. With Italy, France, Germany and the regional Eurozone Services PMIs all missing expectations this morning, the pressure remains on. The only real bright spot was the sharp push higher in Spain, but the improvement in the region’s 4th largest economy will do little to assuage the problems facing the Eurozone. Despite the weakness of the data, the euro has managed to claw back some losses today. However there is a sense that perhaps this is more to do with concerns that the ECB will fail to engage QE at tomorrow’s meeting and subsequently cause a short squeeze. In a further reflection of the Eurozone economic woes, retail sales data also missed expectations and have fallen to just +0.8% for the year (against +1.9% previously). The uncertainty surrounding the ECB’s monthly meeting remains high.

EURUSD   03092014

Trading the euro will be tricky in front of the ECB. The gains on EUR/USD seen today could be testament to the fear of a short squeeze. However, it is difficult to know what the ECB will do. For this reason it may be best to just stand aside for now. The conventional wisdom and also technical analysis suggets that you should use any rallies as a chance to sell and the move back to the $1.3160 resistance is ideal. However the prospect of a short squeeze on the disappointment of no action is certainly an upside risk.

The fact that the euro has rallied more than sterling today adds to this argument of a fear over a short squeeze. The UK services PMI jumped back to 60.5 which is the highest reading since October 2013 and suggests that the service sector which covers around 75% of the UK economy, remains in robust health. However, Cable is trading around the flat line today, whilst the euro is up by around 20 pips.

It is as you were for many of the other major pairs, with consolidation seen in the yen, Swiss franc and Kiwi dollar. The Aussie dollar has managed to hold on to its gains from the Asian session after a better than expected print on Australian GDP was seen, along with positive China services PMI. The Canadian dollar is also stronger ahead of the BoC rates decision at 15:00BST.

The prices of gold and silver have been fluctuating on the geopolitical news today, but broadly speaking, following on from their sharp sell-off yesterday, today looks to be a consolidation move (as the US dollar has also consolidated).

The recovery in equities has been sharp today, with the DAX and FTSE both bursting through key levels. The next test will be whether they can hold on to the gains. The DAX has rallied through the key pivot level at 9600 which had been holding it back, whilst there has even been an intraday 2014 high posted on the FTSE 100.

FTSE   03092014

Hitting 6899, the FTSE 100 was unable to hold on to the breakout as the Russians denied the ceasefire. However, the bulls will now look to use the old resistance as new support around 6834. Momentum indicators are becoming increasingly positive and this it will be extremely interesting to see if the upside momentum can be sustained now. Wall Street is forecast for a positive open, with the S&P 500 futures pointing to an 8 point gain. There is little US data to concern investors this afternoon and it appears as though the market will be running on events out of Ukraine today.

With the US traders back from the Labor Day weekend, the volumes across the forex markets and equities were noticeably higher yesterday. It will be interesting to see if this is a trend that continues.

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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.