29/08/2014: Trading outlook ahead of the US session

Flash Eurozone inflation leaves the prospects QE up in the air but still unlikely

The big focus in this morning’s trade has been the inflation data out of the Eurozone. Would it be the precursor to the ECB further easing monetary policy at next week’s meeting? The answer to that question remains uncertain. The flash reading of Eurozone inflation for August fell as expected to 0.3% (from 0.4% in the previous month). Rumblings out of sources close to the ECB suggested this week that the Governing Council would not be engaging further monetary easing (QE) unless inflation significantly undershot expectations – which has not happened. Also the “core” inflation data actually improved to 0.9% (from 0.8%) too. However, looking at the chart above the trend is very clear. There is a significant tide of disinflation in the Eurozone which is now becoming perilously close to deflation.

EZ HICP   29082014

The ECB recently appointed Blackrock as an advisor for its purchases of Asset Backed Securities. This would suggest that the central bank is closer to announcing “private QE” in attempt to reboot a stalled ABS market in the Eurozone which would in turn help to inject liquidity into the financial system. The inflation data released this morning makes it less likely that the ECB will announce full blown QE (ie. sovereign debt purchases) on Thursday, but it could still give more information on its ABS programme which amounts to “private QE”.

The result has been for the euro to make a small initial jump (between 10 to 15 pips to the upside) in an apparent short squeeze. The market seems to be placed for further dovish moves by the ECB. If this does not happen next week, there could easily be a further short squeeze and a rebound in the euro.

Much of the trading through the morning has been fairly stable with the only significant move coming with a bounce in Dollar/Yen. This move has added strength to the support around 103.50 as the dollar bulls look to consolidate their positions. The correction in both Gold and Silver is also part of the safe move away from the assets at the safer haven end of the scale, as is the move away from core sovereign bonds today (Treasuries, Bunds and Gilts all being sold). European equity markets have also taken a slight leg higher.

This all suggests that moving into the US session, risk appetite has just begun to drip back into the market. As the morning has gone on the improved sentiment and this has set us up nicely for a positive end to the week ahead of the Labor Day public holiday on Monday. The S&P 500 index futures are pointing to a 5 point rebound and another move in the S&P 500 cash above 2000. The volumes remain light, it is unlikely that traders will be taking any significant positions coming at the end of the month and ahead of a public holiday. It would therefore be a quiet afternoon.

The US Personal Consumption data comes out before the market opens, at 13:30BST, with +1.5% expected, which would help to support a positive market outlook. The final reading of Michigan sentiment is released at 14:55BST and is expected to just come back slightly from the flash reading of 81.8 to 80.0. Canadian Loonie traders will be watching out for Canadian GDP data at 13:30BST which is expected to show an annualised 2.7% for Q2.

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