Today's session dependent on one thing: Non-Farm Payrolls

Market Review

Yesterday’s market saw one of the largest sell offs this this summer in dollar terms after initial jobless claims were posted in line with expectations, but with a much higher cost of labour component; indicating that the labour market is in proper recovery mode and implies that one of Federal Reserves main concerns about the labour market, wages, finally is starting to catch up. With higher wages we also see increased inflation, as consumers finally have more money available to spend. In addition they will be able to get higher mortgages amongst other things, and so the ball rolls. The Russian crisis has also lead to a decrease in profit expectations amongst businesses, which has been adding to the selling pressure. With all this we have not seen a continuation in the dollar strength which would be more in line with our expectations for such a move, though it is possible that traders have been holding off for today’s Non-Farm Payrolls. The S&P strategy yesterday was stopped on the movement down, despite a very cautious entry point. No other entry was obtained within the given time.

Today's Fundamental View

This morning have seen the release of worse than expected manufacturing PMI across European nations, which has lead to a leg lower in European equity indices and also helped the S&P continue lower. The euro was initially not very reactive to this, but has surprisingly strengthened in the aftermath. The British Pound have weakened on the back of a weaker number, which comes only days after the International Monetary Fund lowered its forecast for its value. This may create a conundrum for Mark Carney as he is expected to raise rates as inflation increases, though if data starts reversing it may hurt the economic recovery. Today’s trading session is mostly dependent on one thing; Non-Farm Payrolls. The expectations for today’s reading is 231k, versus last months monstrous 288k number. Should the number beat on expectations the S&P should go bid, but we will not guarantee the end of day result, as the index has moved down the last 24 hours on labour cost fears, however irrational they may be. We believe increased wages are good for the economy as a whole, as it may lead to a larger middle class which again lead to higher demand and more possibilities for businesses and the economy as a whole to grow. What we are currently seeing is short-sighted grumpiness driven by capitalists that have a flawed view on how the economy works (higher wages equals lower profit). It is difficult to ignore the move lower although we feel the main move in the short term did happen yesterday and we will for this reason go with a conservative long entry. Crude oil is also proving difficult to trade as the risk premium is fading away amid none of the geo-political tensions have lead to actual shortage of crude oil supplies. In turn it is now leading commodities traders to accept prices with a lower risk premium. The US10Y should continue lower – and as it is one of the only asset that has reacted in conjunction with what we perceive it will the last few day’s we think it may be the most straight forward asset to trade. High payrolls will see it down, lower payrolls will see it move up. The strategy will go against the short term movement in equities as well as crude oil. The strategy in S&P is admittedly somewhat of a Hail Mary trade today, but we only have NFP 12 times a year.

Alternative View

A lower than expected NFP may lead to a move down. With a much better NFP as well we may see the market pricing in a rate hike earlier than consensus, leading to a sell off. Comments from Russian officials may halt the extension higher, though this should still lead to USD strength in a risk off move. Please remain aware of all developments coming out of Ukraine, Russian and the Middle East and keep a conservative outlook with regards to risk. Over exposure in markets with such uncertainty is dangerous and should be avoided.