By Dave Evans of binary.com
Headline Writers Confounded
“Markets plunge on Russian invasion of Ukraine” was what headline writers were aiming for yesterday, but market reaction to alleged Russian incursions into Ukraine was decidedly mixed.
The Russian and European indices suffered 2% and 1% falls respectively, while the S&P 500 closed up on the day, back above the important 2,000 level.
So are markets being too complacent, or are headline writers looking for a story that isn’t there?
There is no clear cut answer, but market reaction so far has been telling. It either speaks of the relative strategic unimportance of Ukraine compared to Federal reserve’s next moves, or confidence that the matter will never flare up to the point of full military conflict.
While headlines were created on Thursday around a Russian ‘invasion’ of Ukraine, these were quickly clarified by Ukrainian President Poroshenko to refer to Russian troop movements into Ukraine. Despite Russian denials and explanations of troops becoming lost, it looks as though the West have had enough, with evidence now clearly pointing to an escalation of Russian involvement at the very least.
Peace talks are now on ice and Russian sanctions look set to be increased further. This is piling the pressure on Putin as sanctions and troop fatalities swing public opinion against the president for the first time in months.
So where now for the markets?
Given that Europe is now at the closest it’s been to having a full blown war on its doorstep since the Yugoslavia conflict, continued ISIS threats and a fragile peace in Gaza – you have to wonder just what would take for markets to sell off significantly.
The answer is clearly that it all depends on what the Federal Reserve does. Judging by recent market reactions – a dovish or hawkish message from the Fed will move the main stock market indices more than armed conflicts across the world.
As the Fed have so far signalled no abrupt change of policy, we might expect markets to remain near the highs for some time. At the very least, a sell off could be unlikely in the short term. Yes markets are over bought and over valued, but this seems to matter little right now.
S&P 500
A short term bullish bet could pay off here, as the last time the S&P 500 broke through a major barrier (1000 in 1997), it just kept on going.
A good way to play this situation is a HIGHER trade predicting that the S&P 500 will close above 2010 in 5 days time could return 204% if successful. Or put another way, betting that the S&P 500 will close above 2010 on September 3rd could return £20.35 from a £10 stake.
ECB hoping words not deeds will see them through
The euro gapped lower at the open on Monday morning following the ECB’s announcement that it is considering Quantitative Easing. However, there was little follow on selling after this initial reaction.
EUR/ USD:
The lack of follow through, or a larger sell-off implies that markets had already anticipated such a move from the ECB.
In addition, there is a huge difference between talking about action and actually initiating it. The ECB has a history of letting its talking do the action, which could mean we’re waiting some time before Easing becomes an active policy. The EU economy is still lifeless, which is a danger, but there could still be some short term upside from here over the next week.
A good way to play this is a ONE TOUCH trade predicting that the EUR/ USD could touch 1.3225 at some point in the next 5 days for a potential return of 146%. Or put another way, betting that the EUR/ USD will trade above 1.3224 even for a brief second before September 3rd could return £14.59 from a £10 stake.
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