Sanctions on Russia negative for risk assets

Market Review

The first half of yesterday’s session saw positive momentum in equities as Chinese GDP beat expectations and a strong rebound in Banco Espirito Santo’s share price as news surfaced that they will be able to raise capital from private investors. Bank of America then continued the run of positive earnings results from the financial sector and the S&P was able to climb to within a tick of its early July all time high. T-Notes drifted lower to test Monday’s low and the Dollar continued to strengthen against the Euro after Yellen’s testimony from the day before. However, the mood changed going into the US session as the US Industrial Production data for June slightly missed expectations and news surfaced that the US were going to implement further sanctions on Russia. Crude oil prices had driven strongly below the $100 handle on Tuesday extending a 3 week long large sell off, but the Russia news reversed momentum with crude prices rebounding strongly back to the $101 handle. Equities drifted back of their highs, T-Notes rebounded early downside but the US Dollar continued to strengthen against the Euro.

Today's Fundamental View

Today’s session has been broadly negative for risk assets following Obama’s announcement overnight that further sanctions have been placed on Russian companies. Crude prices have added to yesterday’s strong rebound breaking up above $102 which is now a $3 rebound from Tuesday’s low. The S&P 500 has tracked lower breaking down below the earlier morning support at S1 pivot level and currently trades 0.6% down on the session. T-Notes have broken above yesterday’s highs and looks to test Tuesday’s high at 125.080. Eurozone final inflation figures for June showed an unchanged figure at 0.5% and we now head into the looking out for Initial Jobless Claims, Housing Starts and Philadelphia Fed survey figures from the US. The earnings calendar is filling up with Schlumbergr, Philip Morris, United Health and Morgan Stanley all due to report before the opening bell. Tonight sees Google and IBM report earnings after the US close. Despite this busy calendar it is likely to be the Russian geo-political risk that dominates market behaviour and we expect a continued preference for risk-off trades. We look to short the S&P and EURUSD on any pullbacks, we look for a long entry on T-Notes and despite crude oil’s large rebound in the last 24 hours we feel there is more upside to come but appreciate this is now a tricky trade in terms of finding a solid entry point.
 

Alternative View

Positive developments regarding Russia/Ukraine situation should lead to a decent reversals of this morning’s moves.