The markets are set for a major week, where almost every region is expected to see something that could really provide volatility. In the US, the focus will certainly be upon Janet Yellen and the FOMC when they decide whether to keep their statement the same or not. In the UK, the jobs report looks set to provide an insight into the health of the labour market in November. Meanwhile, the eurozone PMI figures are going to be crucial following disappointing figures last month.
In Asia, the Japanese snap elections on Sunday are going to provide the setup to a big week which ends in the latest BoJ decision on Friday. On he other hand, the Chinese focus looks to be upon the HSBC manufacturing PMI which represents the only event of note to watch out for. Finally, the Australian traders will be well aware of the release of RBA minutes on Tuesday following the recent decision to keep rates stable.
[B]US[/B]
A crucial week in the US markets, predominantly due to the release of the FOMC monetary policy decision on Wednesday. However, with the release of data points such as the CPI and the Philly Fed manufacturing index also being released, there is more to look out for other than the FOMC.
That being said, Wednesday’s FOMC meeting is certainly the main event of the week given the impact that this month’s jobs report has had upon expectations of a shift in tone this week. No change in actual policy is expected given the fact that the earliest most analysts see any change is mid to late 2015. However, the tone of the statement is going to be absolutely crucial this week, with many expecting Janet Yellen to remove the ‘considerable time’ comment with regards to how long rates would remain at the current lows. This month’s jobs report was overwhelmingly positive, with payrolls, average earnings and hours worked all improving. As a result, Yellen will be under greater pressure to make a move, yet with disinflationary pressures likely to persist due to falling oil prices, it is going to be interesting to see whether the committee chooses to keep the comment in or not. Given that opinions are split within the markets, I expect to see some volatility irrespective of the decision by the Fed. Also be aware that the Fed are due to release the latest FOMC economic projections, with growth and inflation the most important to watch out for in terms of any revisions.
Also on Wednesday, the latest US CPI figure will provide greater clarity upon whether the disinflationary pressures that have been evident amongst the likes of the UK, China, Japan and most notably the eurozone. As yet, the US has remained relatively resilient, with last month’s reading of 1.7% representing a pretty untroubling figure for the Fed. However, the global trend is certainly to the downside and thus it will be interesting to see if this is finally represented in the US. Should we see a big move lower, it could impact future expectations of monetary policy at the Fed. Expectations point towards a fall from 0% to -0.1% on a month-on-month basis.
[B]UK[/B]
A big week ahead in the UK, where the bank stress test results, CPI figure and jobs report means that we will certainly have alot to get stuck into as the week progresses. Tuesday’s stress test results will be watched closely within the markets, with particular attention being paid by those investing in the banking sector. Given the size and importance of the banking sector in the UK, it is going to be absolutely crucial to know that the top banks are adequately prepared for a potential crash going forward. Whilst we have seen the results from the European stress tests not so long ago, this round of tests are expected to be tougher and thus there is likely to be a higher fail rate. Unlike the European tests, this will be a small scale thing, comprising of just the eight largest lenders. Watch out for how many and by how much different banks have failed to gauge exactly how much market impact this could make.
Later on Tuesday, the CPI figure for November is going to provide us with a clear idea of whether inflation is going to continue the downward trajectory seen since the 3.7% peak in 2011. Currently at 1.3%, the threat to BoE policy isn’t massive right now, but with oil prices falling it is clear that as time goes on, there will be downward pressures upon this figure. For the most part, the fall in oil prices will not be felt for the consumer yet at the pump given that oil is generally bought in the futures market and thus any major gas station will generally have prices fixed for a given time frame. However, the likeliness is that once that contract runs out, there will be a fall in petrol prices and thus CPI will fall more sharply. Therefore BoE inflation expectations will certainly be downward in the future months and this means that I expect CPI to continue to fall going forward. Perhaps not at the rate that the likes of Brent and WTI have been moving for the reasons above but it is likely to be the case that inflation will continue to fall for some time yet.
Given the influence of the oil prices on this figure, it is worthwhile also watching the core CPI figure which strips out volatile elements such as energy. This month both the core and headline figures are expected to remain steady, yet with the influence of oil prices likely to continue to persist, I would expect a greater disparity between the two as we go into 2015.
Wednesday sees the release of the November jobs report, with the claimant count and unemployment rates representing the most commonly watched elements. The jobs market, just like in the US, is absolutely crucial for monetary policy going forward. The outlook from the MPC is likely to be influenced heavily by the jobs data and thus any big move on Wednesday not only impacts the view of how healthy the UK economy and growth is going to be going forward, but also the BoE actions going forward.
The unemployment rate is likely to be the main figure which newspapers grab on to given its simplicity. Therefore people will grab onto this as a gauge of where the UK economy is currently. Market estimates to the figure remaining at 6%, yet with the trend certainly to the downside, I wouldn’t be surprised to see a move lower. The claimant count figure is the more volatile of the two and for that reason it can bring about a greater impact upon the markets. This month’s figure is ex[expected to fall to -22k, from -20.4k last month.
[B]Eurozone[/B]
The eurozone region is looking forward to a key week, given the release of the PMI and final CPI figures. The first of these events comes in the form of a whole raft of PMI numbers, which provide a forward looking idea of what each sector is looking like from the perspective of purchasing managers. These figures can typically provide a great indication of what the economy is looking like right now. Given that figures such as jobs and growth data typically lag somewhat, the PMI numbers will give us an idea of which direction they could go in. The most important of these is the German manufacturing PMI and eurozone manufacturing PMI figures owing to their size and proximity to the 50 mark (which separates contraction from expansion). With the German manufacturing PMI currently in contraction at 49.5 and eurozone manufacturing PMI moderately expanding at 50.1, it will be crucial to see if either moves above or below that 50 mark to spark market interests.
Wednesday’s final CPI reading is crucial simply due to the pressure that inflation has placed upon Mario Draghi and the ECB. Following a poor TLTRO takeup, it is expected that the ECB are moving closer to QE and any move lower in this could push him closer towards that move. However, this is a final number and thus we have already seen the first estimate come in at 0.3%. Expectations point towards it remaining there, but any move could really spark interest in the markets.
[B]Asia & Oceania[/B]
A big week ahead in Asia, where Japan in particular has alot to look out for given Sundays snap elections and BoJ announcement later in the week. Sunday’s election in Japan took many by surprise given that most do not see Shinzo Abe’s role as being jeopardy at all. The ability to finally end a decade of deflation and poor growth means Abe has a great degree of support in Japan. However, he clearly feels there is the need to gain a greater majority and thus he used this election as a means to both gain that along with the ability to ratify public opinion on the very divisive issue of an increased military force. However, Abe will be less than happy by recent developments, which have seen the economy move into recession. Thus it is unlikely that Abe will gain much ground at this election, yet I also do not think he is going to be suffering too much given the impact his measures have had. Therefore I do not think we will see too much of a difference in the voting and ultimately I believe Abe will be re-elected quite comfortably.
Friday sees the BoJ make yet another crucial decision in relation to monetary policy, following a much more dovish stance in recent months. The decision to ease further, raising asset purchases from 50 to 80 trillion yen was a big surprise and has led to major selling of the currency in the FX markets. However, with disinflation persisting and the country now in recession, it is possible we could see another move in the next few months. Therefore keep a keen eye out for this release as a potential source of volatility.
Finally, the Chinese HSBC manufacturing PMI figure is going to be the only figure out of China to be watching out for. This focuses predominantly upon the smaller to medium sized firms (SMEs) and thus any downturn in the region will often show on this measure first. Given last month’s number of 50, the measure is teetering on contraction, leading many to believe we could see that fall back below 50 following 5 months of positive growth. Therefore, keep on the look out for a potential drop below 50 to spark off fears of yet another deterioration in the Chinese region which typically has an impact upon the global market sentiment.
[B]Markets continue lower as Abe retains super-majority[/B]
• Oil gaps lower but recovers early in the session to trade above Friday’s close;
• Japan’s coalition retains super majority in pointless election;
• Confidence in Japanese manufacturing sector slips after country falls into recession;
• PBOC expects 7.1% growth in 2015 which may concern investors;
• Start of the week quiet but things will pick up.
The negativity that drove the US to its worst weekly performance in three years appears to be continuing on Monday as Asian market traded deeply in the red overnight and European futures point to a similar open as well.
The poor performance in equity markets has been driven largely by a lack of economic events and negative speculation, particularly relating to the Fed’s statement which is due to be released later this week. This can sometimes happen in quieter weeks, especially when the markets have been on a good run. Investors are looking for a reason to lock in a little profit and any news therefore has a negative twist put on it and reports emerge that spook investors.
The best example of this is the speculation that the Fed is believed to be considering removing its commitment to keeping rates low for a considerable period of time after the end of quantitative easing, which came in October, raising the odds of a rate hike in the middle of next year or even sooner. While this report may be true, we should remember that the same report emerged last month and turned out to be false which suggests to me that it may not be totally trustworthy and instead just be a little fear creeping into the markets.
The main thing weighing on sentiment recently and driving certain equities lower is the continued sell-off in oil, with the decline having continued on Friday having broken through the $60 a barrel level in WTI crude and gapped lower this week. This is particularly hurting energy companies but as we saw last week, the consumer is clearly be nefiting which should be viewed as a positive, particularly for countries like the US and the UK where the consumer is so important to the economy.
Markets largely shrugged off Shinzo Abe’s election victory over the weekend as the coalition retained its super majority in a vote that effectively changed absolutely nothing. While Abe’s Liberal Democratic Party lost a few seats in the vote, its coalition partner gained a few leaving the coalition no worse off than it was before. While Abe may view this as a vote of confidence from voters, the rest of us are left wondering what the point of this exercise was while the markets couldn’t care less. No one expected the result to be any different and nothing has changed.
Of more interest to investors was the Tankan manufacturing index for the fourth quarter which was released overnight and showed a slight turn to the downside, falling from 13 to 12, adding to concerns about an economy that in the third quarter fell into recession. While this is a concern, as the last six months has clearly damaged confidence in the economic outlook, the country is still expected to climb out of recession in the fourth quarter and with this is likely to come an improvement in sentiment so it may not be worth getting too concerned yet.
What investors may find more concerning was the report from the Chinese central bank that claimed growth could fall to 7.1% next year. This fact in itself is not going to shock anyone given the country’s performance this year, but given that the central bank forecasts this fall may prompt people to revise lower their forecasts as the likelihood is that it is to the upside of what we can actually expect. This year has taught us that the government and central bank are probably a little over-optimistic while being willing to let growth fall more than they were in the past. Therefore, when they release forecasts like this, we should probably price in below 7% growth and that is what I expect many to do in the coming months.
It’s going to be a quiet start to the week, with very little data being released. The New York empire state manufacturing index and industrial production figures are the only notable releases today and even these won’t shake things up too much. As the week goes on there’s plenty of major events though including the Bank of England minutes and latest FOMC decision on Wednesday and the BoJ decision on Friday so I don’t expect it to be quite as slow as the week just gone when it comes to news-flow.
The FTSE is expected to open 51 points lower, the CAC 21 points lower and the DAX 40 points lower.
The Russian Ruble is in freefall this morning despite efforts made overnight from the Central Bank of Russia to at least slow the decline. The CBR threw everything including the kitchen sink at the currency problem overnight following the largest one day drop against the dollar since 1998. Initially, the 6.5% rate hike to 17% appeared to have brought some short-term reprieve for the Ruble but unfortunately for the CBR, it was much more short-term than they hoped and it wasn’t long before the markets rejected the central banks efforts and opted to continue on the same course.
Clearly many traders were very grateful to the CBR for giving them such a great opportunity to buy in at such discounted levels. Since the initial pull-back to 58.33, the dollar has sky rocketed more than 26% before settling just above 73. At the time of writing, it doesn’t look like traders are in any way interested in exiting their longs yet, with prices just consolidating. I get the feeling that traders are just taking a breather and there could be some more crazy selling to come in the Ruble.
[B]Volatility reigns as BoE and FOMC look set to dominate[/B]
• Russian confidence at a low as ruble plummets
• Eurozone begins slowly turning around
• Falling UK CPI crucial ahead of US release
• MPC minutes key as falling inflation could change outlook
• FOMC announcement focused around potential language change.
Market volatility appears to be the order of the week, as a range of economic and political announcements mean that we have seen traders find it difficult to know whether we should be coming or going. A US fiscal deal, sharp movements in the oil price, a Russian central bank freakout, UK bank stress tests and a plummeting CPI has contributed to a particularly notable week where it can be quite tough to actually predict in which direction the indices will end up at the end of the day. This has been exemplified perfectly by the Asian markets overnight, which saw the likes of the Hang Seng and Nikkei swing between major losses and gains. Ultimately the current market indecision shone through with the Nikkei ending up higher while the Hang Seng closed lower. We are expecting the European markets to have more of a consensus, with the FTSE100 likely to open around -60 points, DAX -121 points and the CAX -66 points.
Yesterday saw an extremely volatile European session, personified by an absolute lack in the Russian central bank, a very mixed set of data points out of the eurozone, along with a UK CPI level that was the lowest since 2002. The Russian decision to hike their interest rate by 6.5% was a bold one to say the least, showing exactly how serious they are about halting the recent slide in the value of the ruble. However, the markets were far from tempted by these massive rates and instead saw it as an act of desperation, leading to an 11% fall against the dollar; the steepest fall since the 1998 Russian financial crisis. With Obama due to announce another set of sanctions in the very near future, it is clear that Putin may have to change tact to get their economy back on track and that can only really be a shift in Ukraine policies given that oil prices appears to only be heading in one direction.
The eurozone’s weaknesses appear to be abating to some degree, with the announcement of an absolutely massive ZEW report, along with a largely positive range of PMI figures. Exports appear to be on the rise and with a weakening oil price alongside an already weak euro, the conditions appear to be conducive to enabling a recovery in the region. Whilst it is not really worth getting too excited, this is a sign that the recent downturn may be ending and now we are moving towards one of a recovery.
UK CPI fell to the lowest level since 2002, as a rate of 1% shocked the markets and led many to believe that the BoE will have no choice but to become even more accommodative going forward in terms of interest rate hike timelines. One thing is clear and that is that this slump in inflation is to a large extent driven by falling oil prices and thus central bank policy is unlikely to really impact that factor. Should the BoE manage to compensate for this fall in inflation by raising core inflation (without energy), then they also run the risk of seeing the headline figure skyrocket once this game of chess being played by Saudi Arabia is over and prices return to ‘normal’ in the energy market.
What will be interesting is whether yesterdays figure is indicative of the global experience and that will be seen later today, when the US CPI number is released. So far, the US has managed to keep their head above the water somewhat, with disinflation in Europe having less of an impact upon their level of CPI. However, as falling oil prices are gradually factored into the prices at the pump and for firms, it will be likely that the US should follow suit. Both the core and headline figures are expected to fall, but given the experience within the UK, there is the possibility of a surprisingly larger fall than estimated.
The European session is looking likes it will be largely dominated by the UK, where the BoE minutes are released simultaneously alongside the jobs report. The BoE clearly has a penchant for releasing data points together, with the announcement that soon these minutes will be released alongside the initial announcement, starting in 2015. However, for now the focus will be upon the belated outlook seen within the meeting earlier this month and given the movement within inflation recently, there was an expectation that we could have seen votes change in favour of no change in the interest rates. This was not the case, however there is likely to have been a change in outlook from the committee, as the threat of further disinflation became increasingly evident. Thus the minutes will be crucial in determining whether the MPC is worried about the impact falling oil prices will have upon inflation and what they would do should it fall like it has yesterday.
Meanwhile, the US session will see the release of the latest FOMC decision, with many hoping for a change in language from Janet Yellen. The US economy has been booming of late and despite the woes felt across the likes of the eurozone and Japan, they are clearly not too worried about the threat of contagion as many expect an even more bullish Fed with month. This months meeting will be dominated by one single phrase and whether it is included or not will likely be the major determinant of market direction off the back of the meeting. That phrase relates to the FOMC’s promise to keep rates low for a ‘considerable time’. Should this be removed, then the timeline for a rate hike has surely got to be shortened in response. However, given the experience of the UK in relation to CPI, it is likely the Fed will be pragmatic at a time when oil prices are starting to hit global inflation levels. Thus I do not see it to be sensible for the FOMC to change their statement at a time when their inflation levels could follow suit, leaving Yellen and co in a sticky situation where the ‘considerable time’ phrase were to be put back into the statement.
[B]Fed in focus as investors look to statement for rate clues[/B]
• Two MPC members continue to vote for rate hike despite low inflation outlook;
• Wage growth exceeds expectations again but remains below 2%;
• Russian Foreign Ministry looking to sell final $7 billion of reserves;
• Fed expected to remove commitment to low rates at today’s meeting.
The Bank of England minutes from the meeting a couple of weeks ago showed two policy makers – Martin Weale and Ian McCafferty – once again voting in favour of a 25 basis point rate hike despite the fact that inflation fell to 1% last month, as measured by the consumer price index. This is well below the BoE’s 2% target and while many have pointed to falling oil prices as being behind the move, core inflation which strips this out fell to 1.2%, which suggests there’s more to it.
With this in mind, I find it hard to understand how Weale and McCafftery can still justify wanting to raise rates which would typically weigh even heavier on the inflation outlook. That said, they are widely viewed as the most hawkish members of the Monetary Policy Committee so maybe it shouldn’t be too surprisingly. On that same point, their opinions are unlikely to represent those of the rest of the committee and I don’t see the voting changing much towards a hike for most of the year at least. It could even be 2016 before it happens given the outlook for inflation and wage growth.
Wage growth is improving in the UK and once again in the three months to October was better than expected, rising by 1.4% including bonus’ and 1.6% excluding bonus’. While this should be celebrated as it shows progress is being made and more importantly, it’s above inflation meaning real wages are finally rising on a consistent basis, it remains below the central banks 2% target so we can’t get carried away. The fact that real wages are rising is purely down to luck and if the BoE can achieve its target in the near future, real wage growth will once again be non-existent. Big improvements still need to be made and for that reason, it’s important that the BoE remains accommodative.
While the BoE may have become much less hawkish of late, its job over the next 12 months could not be much different than that of the ECB which is looking to aggressively expand its balance sheet in an effort to stop the eurozone falling into a deflationary spiral. Efforts made by the ECB so far have been good enough, with its balance sheet actually shrinking as a result of LTRO repayments. The first two take-ups of TLTRO’s have quite frankly been poor and nothing else appears to have done much at all, with inflation confirmed this morning as being at 0.3% in November. There was speculation after the last meeting that the ECB was drawing up plans for a broad based quantitative easing program which may be the best chance it has of preventing an deflation crisis. It may create political problems but the central bank is clearly getting desperate and running out of ideas.
Further efforts are being made by the Russian Foreign Ministry to stabilise its currency after two days of absolute mayhem for the rouble. Prices rose to an all-time high of 80 roubles to the dollar yesterday before retreating, having fallen to 58 earlier in the same day in some of the most volatile trading conditions most people will ever see. The ministry only reportedly has $7 billion of reserves which makes you wonder how much its efforts will actually stabilise it, given that the Central Bank of Russia has apparently conducted $80 billion of interventions this year to little avail.
As if everything that’s gone on this week wasn’t enough for the markets to get to grips with, this evening we’ll get the final monetary policy decision of the year from the Federal Reserve. The decision itself is unlikely to come as a shock, with rates remaining unchanged, it’s the wording in the statement that people are most concerned with. For a long time now, the Fed has committed itself to keeping rates at record lows for a “considerable” amount of time beyond the end of QE. The FOMC is believed to be considering removing it this month in a move that would clearly signal an imminent rate hike to the markets. I expect plenty of volatility around this event whatever they do. I’m sure if this is removed, Chair Janet Yellen will do her very best to assure the markets that it won’t come until the middle of next year, the only question is whether the markets will buy it.
The S&P is expected to open 7 points higher, the Dow 62 points higher and the Nasdaq 14 points higher.
[B]Data heavy day ahead with focus on UK, US and Germany[/B]
• Fed takes more cautious approach on rates and retains “considerable time” pledge;
• German Ifo surveys and UK retail sales the focus this morning;
• Lots of US data to come later including jobless claims and PMI readings.
Investors were given a small boost overnight which is driving index futures higher ahead of the open as the Fed spoke of its confidence in the US economic recovery, while taking a slightly smaller step towards warning on imminent rate hikes in 2015. The FOMC opted not to remove its pledge to keep rates low for a “considerable” time, instead adding a sentence that stated it can be “patient in beginning to normalise the stance of monetary policy” as well as a number of caveats that effectively gave it the freedom to alter its position at any point while technically remaining transparent.
It would appear that the Fed is going to be far more gradual in its approach to raising rates while remaining as transparent as possible with investors so as to avoid any unnecessary shocks in the market. The unprecedented nature of the Fed’s exit strategy - with it attempting to return to normalisation following the greatest stimulus program in its history in which it raised its balance sheet to more than $4.5 trillion - means it needs to tread extremely carefully as it simply doesn’t know what the consequences could be if it doesn’t. The markets can become extremely volatile very quickly at which point panic will usually set in and this is something the Fed desperately wants to avoid.
I do wonder if the Fed’s decision to take such a small and mindful step at this meeting has anything to do with the excessive amounts of volatility already seen in certain markets already this week. Maybe the Fed decided that given how trigger happy investors became following the rouble sell-off, it would be sensible not to risk further panic in the markets by removing its pledge altogether and risk sending the wrong message. Clearly the Fed is saying that the middle of next year remains the target but there are a number of things that could change this and just removing its pledge may suggest that the first rate hike will come sooner than expected, something the market were unlikely to be too pleased with.
While the biggest event of the week may now have passed without too many problems, there’s still a lot to come starting today with a number of key economic releases. From Germany we’ll get the latest Ifo readings of business climate, current assessment and expectations, all of which are expected to have improved slightly in December. The survey tends to be quite respected by the markets due to its larger sample and therefore can have a significant impact on the markets. Given the much better manufacturing PMI and ZEW surveys earlier in the week, I think we could see a much better improvement in the business climate reading for December, which hopefully bodes well for the new year.
In the UK the consumer is under the spotlight with retail sales figures for November being released. The consumer is so important to the UK economy and these figures could provide insight into what the consumer trends will be as we enter the hugely important holiday season. Holiday spending seems to start earlier and earlier nowadays as retailers bring forward sales more and more in an effort to entice customers into their stores. Expectations are for only a small rise in sales of 0.3% last month following a strong showing the month before. This markets a dramatic improvement on the year earlier period though so I don’t think it’s anything to be too disappointed with, especially at a time when wage growth remains subdued.
There’s plenty more data to come from the US later including weekly jobless claims, December services and composite PMI readings, CB leading indicator and the Philly Fed manufacturing index. With all this to come, I think we have a few more days of market volatility to come before we enter the quieter holiday period.
The FTSE is expected to open 46 points higher, the CAC 35 points higher and the DAX 88 points higher.
[B]US jobless claims, PMIs and Philly Fed figures in focus[/B]
• FOMC stance helps lift global markets on Thursday;
• German Ifo provides optimism ahead of 2015;
• UK retail sales surge on black Friday sales;
• Putin inaction gets market disapproval as rouble falls further;
• US jobless claims, PMIs and Philly Fed figures in focus today.
An upbeat Fed message on the economy on Wednesday combined with encouraging economic data from Germany and the UK this morning is helping to lift global markets on Thursday, with US futures pointing towards another day of strong gains.
It was widely expected that the FOMC would remove its pledge to keep its target range for the federal funds rate between 0 and 0.25% for a “considerable time” after the end of quantitative easing, which came in October, but it instead opted to just soften the language around it, making it less of a commitment and more guidance. The message remained fairly dovish with the Fed stating that it would be patient when it comes to raising rates. The use of a number of caveats also gave it the option to be very flexible with the hikes. The most important message that came from this was that we’re unlikely to see a rate hike in the next couple of months but the US economy is finally in a position to stand on its own two feet and the markets clearly approve of the message.
The German Ifo business climate reading for December exceeded forecasts this morning, rising to 105.5 up from 104.7, with the rise being led by the expectations figure that rose to 101.1 from 99.7. Current assessment was unchanged at 110. While these figures don’t necessarily come as a great shock given the similar improvements in the manufacturing PMI and ZEW readings earlier in the week, they are nonetheless encouraging. The stabilisation in the current assessment figure alongside a more optimistic outlook hopefully points to some form of resurgence going into 2015 following what has been a year to forget in 2014.
UK retail sales were much stronger in November than expected which is helping to feed into the strength in the pound this morning. Any gains following the release were quickly reversed but this was probably largely driven by the strength of the rally into the release. It has since continued higher, further supporting the view that the reversal was merely a correction. It was expected that we’d see a small increase of 0.3% but this was smashed to bits, with the overall reading showing 1.6% growth, equating to a 6.4% improvement on the year. Black Friday sales were largely behind the upside surprise driven by heavy discounting which generated record annual sales growth in electrical and department stores.
In Russia, Vladimir Putin addressed the nation and took the expected stance of blaming external factors for the countries struggles and currency decline. He appeared to offer little in the way of a solution to the crisis, instead assuring people that the recession would pass in the next couple of years as the global demand for oil recovers. While his still strangely high popularity may mean he doesn’t receive a backlash from the Russian public for his inaction at a time of great distress for the country, the markets aren’t quite as forgiving and the dollar quickly rallied to 64 against the rouble before stabilising around 61. Once again, Putin is relying on nationalistic pride to get him through this, claiming the West is trying to put the “bear on a leash” and pull out its teeth. While this may work in his favour for now, once the economic troubles hit people hard, they may not be as willing to accept it.
Still to come today we have plenty of US data being released starting with the latest jobless claims figures. The numbers appear to be stabilising now just below the 300,000 level, with this week’s seen at 295,000. This remains a strong reading and provides further evidence of the strong position the US economy now finds itself in. The preliminary reading of the December services and composite PMIs will follow this and both are expected to show a rebound from Novembers small decline. The services PMI in particular could give us some great insight into the expected spending patterns of the consumer in the always important holiday period. Also being release is the CB leading indicator and the Philly Fed manufacturing index so there’s plenty for traders to get their teeth stuck into today.
The S&P is expected to open 24 points higher, the Dow 179 points higher and the Nasdaq 50 points higher.
[B]BoJ remains steady, yet bullish markets push higher[/B]
• FOMC continues to drive bullish sentiment
• BoJ keeps stable yet election provides renewed mandate
• German GFK survey looking to top off strong week
The end of a memorable week in the markets, which seemed likely to go out with somewhat of a whimper given the relative lack of events to get the market moving. However, this doesn’t look like it will affect sentiment too much with many still reeling from the massive news out from the likes of the FOMC, Japan and Russia. As a result, the European markets are hoping to extend the positive sentiment seen overnight in Asia, by pushing yet higher and closing out the week on a positive note. The FTSE100 is expected to open up by 77 points, CAC by 53 points and DAX by 106 points.
The dominant market sentiment driver appears to be the FOMC statement from Wednesday, which saw Yellen and co produce an increasingly dovish tone amid calls from many for the Fed to finally be done with the ‘considerable time’ section of the statement. In fact, they moved the opposite way, noting that they will be ‘patient’ with the process; no doubt a reference to the need to hold off until the oil price and thus inflation rate stabilises. Ultimately, Saudi Arabia’s decision to push oil prices lower has brought about an unexpected source of market bullishness, where the likes of the BoJ and ECB are now even more likely to push for further easing, whilst the likes of the UK and US have taken a step back somewhat from what looked like a strong push towards raising rates in 2015.
Overnight, the BoJ kept monetary policy stable at 80 trillion yen of asset purchases monthly; a move that was largely expected by all. Kuroda, along with Shinzo Abe was essentially on the stand when Sunday’s election went ahead given that his loose monetary policy has been a backbone of so-called ‘Abenomics’ as we know it. Thus the ability to retain a super-majority will have emboldened Kuroda and the BoJ to remain bold with their monetary policy going forward. With inflation likely to continue falling due to the impact of oil prices, it will be interesting to see if the BoJ will move yet again in heightening the rate of asset purchases. There is certainly the need to push both growth and inflation higher, but the question is whether the BoJ really believes that another shift in the rate of purchases will make an impact. Given that we have only recently seen a seismic shift from 50 to 80 trillion yen of QE, it is highly likely that the committee will leave the effects to work through into the economy for some time and only then will they know how effective it is by itself at raising prices. Thus as we come into 2015, it is not unlikely that we will see another rise in easing, yet Q1 seems to be somewhat of a stretch.
Looking at the European session, there seems to be very little in terms of major events, with one of note coming in the form of the German GFK consumer climate survey. This release has the chance of topping off a very strong week for the German economy following very strong manufacturing PMI, ZEW and Ifo surveys. Conditions are clearly improving the Europe biggest economy and that can only be a good thing for the eurozone. Signs point towards a potential bottoming out in eurozone fortunes of late and this is likely to have been driven by Germany. Given that surveys are typically seen as a great indicator of future quantitative figures, a clean sweep of positive figures would be a huge boost to an ailing economy of late. Markets expect a third consecutive increase in this figure, from 8.7 to 8.9, yet given the trend we have been seeing, I think it may even go higher yet.
[B]Greek elections and oil prices weigh further on sentiment[/B]
European investors are continuing to be put off by the growing risks associated with the snap Greek elections this morning, as fears that victory for the far left leaning Syriza party next month could encourage other austerity hit countries to move in the same direction.
We’ve already seen a rise in popularity in anti-austerity parties in many countries including the UK which has been suffered much less than many of the eurozone periphery. The European elections last year saw a significant rise in voting for these parties, leading to many being elected. The fear is that with so many elections in the hardest hit countries to come next year, the eurozone project could come under some serious pressure if more of these parties are elected.
The Syriza party is clearly confident of victory, as seen by its leader Alexis Tsipras’ tweet to the leader of Spain’s anti-austerity party in which he declared “We will win”. His confidence is understandable given the lead that his party has in the polls, although based on those numbers, he would not have enough support to gain a majority so there’s still plenty to play for.
US markets weren’t really impacted by the Greek news on Monday but they are edging lower this morning as lower oil prices continue to weigh on energy stocks. With so little data being released this week, we’re likely to see oil prices play a major role in equity market moves. The only notable release today is the December consumer confidence reading, which is expected to rise to 93 from 88.7, just shy of the seven year high reached in October.
The S&P is expected to open 5 points lower, the Dow 25 points lower and the Nasdaq 5 points lower.
[B]US data in focus but year end trading volumes remain low[/B]
The final day of the year is likely to be very lightly traded with many investors getting ready for their new years celebrations rather than trying to work out what is exactly behind today’s market moves.
The problem we face on days like today is that because trading volume is so light, it can take very little to move the markets compared with an ordinary trading day. Throw into the equation that it’s the final day of the year and something as simple as fund managers balancing their books, locking in some profits or cutting losses can be behind market movements.
Of course we could look at yesterday’s selling in the US and suggest it has something to do with the snap Greek elections and how that may influence the ECBs decision to buy government bonds – quantitative easing – which many have suggested will come in January. However, there was no selling on Monday following the failure of the third Presidential vote which would suggest otherwise.
Oil prices are another thing that could be blamed for yesterday’s selling but again, prices did not close far from their opening levels, unlike with US stocks. And today we’ve seen further selling in oil, with it now back near the five year lows hit yesterday, and yet US futures are pointing higher.
It will be interesting to see what kind of an impact today’s US economic data will have on the markets, if any, with jobless claims, Chicago PMI and pending home sales numbers all being released. None of these tend to be particularly big numbers for the markets, but in this low volume environment, we may get more of a reaction than we are used to seeing.
[B]Eurozone dominating as markets come back to work after Christmas[/B]
Good morning and Happy new year!
Isn’t it depressing!
This Monday finally sees the return of most traders from the Christmas break and also the return of the volume into these markets. We may have had an extended Christmas break but it very much seems that the news stories dominating market direction have not changed, with a slip lower in the oil price, the ECB driving the Euro lower and the Non farm payroll number all dominating proceedings as we jump back into this first full week back. We also come back on a fairly busy week for the economic calendar this week with Eurozone CPI, PMI numbers, BOE rate decision and the US jobs report all set for release this week. So any one who thought they could just ease themselves back into things with a comfortable week will have a bit of a shock coming.
The Eurozone is the main talking point as we get going this morning as the Euro weakened to a nine year low against the US dollar trading below 1.1800. This is no surprise after the drama of the last couple of weeks with Greece, Germany and Mario Draghi himself. Greece seem to be edging closer to a Eurozone exit as the major political parties get themselves ready for elections later this month. It has been said over the weekend that German Chancellor Angela Merkel is now ready to cut losses in terms of the overall Euro area and accept a Greek exit from the single currency union. Germany itself has been struggling with extremely poor economic data, with unemployment CPI, GDP growth and import and export growth all looking sluggish. CPI readings this morning out of Germany will give yet another clue into how well the Germans are managing to hold off the drastically low inflation number for the Eurozone as a whole. Last week also saw ECB president Draghi hint yet again that a full round of government bond buying was just around the corner after he told us that further preparations were being made. Expectations now seem to pushing towards the next ECB meeting for the news of full blown QE, and with Eurozone CPI is expected to show that prices fell for the first time in five years in December which would add further weight to Mario Draghi’s plan.
However hitting the CPI readings as ever is the continuing slide in the oil price. Oil saw a brief rest bite over the Christmas period as lower volumes meant that the falls were not extended however with a full session of solid trading volumes today we are already seeing lower prices. WTI crude oil dropped to $51.78 overnight. The news of lower oil prices will not be a positive thing for those looking for a strong number in the CPI readings from Europe later in the week. Despite the fact that some write off the low oil prices as something unnaturally dragging the CPI readings down we cannot escape the fact that even if you strip out the oil price from your readings, anything on a domestic level still needs energy to run, meaning that the oil price is not as irrelevant as people would like to think when looking at the core CPI readings, which are expected at 0.7% for December when we get the reading on Wednesday.
As the week moves on we have a whole host of economic data due to release, most notably the US non farm payroll number. With the Fed still looking on track with its monetary policy and potential date for rate hikes this number should be judged on a month by month basis these days and not as a tool to gauge the date for a rate hike. Continued dollar strength should continue its weekly theme no matter what the payroll result on Friday, however as usual equity markets are likely to be in for some fierce volatility over the number.
Ahead of the open we expect to see the FTSE100 open lower by 10 points and the German DAX lower by 11 points.
[B]Slow start to a big week for the US expected[/B]
• Focus on Europe as Greek elections threaten ECB QE plans;
• UK a concern with general election, EU vote and cooling economy weighing;
• US session quiet but busy week lies ahead.
A quiet start to the week for the US despite the return of many traders following the new year break as a lack of economic data or events leaves investors looking for direction elsewhere.
For now, it’s Europe that’s guiding investors with snap Greek elections later this month potentially setting a precedent for elections in other austerity stricken countries this year, with the anti-austerity Syriza party currently leading in the polls. While a Greek exit won’t be as catastrophic as it would have been a few years ago, it’s certainly undesirable and should Syriza rise to power, the eurozone faces the tough task of doing what it can to keep Greece in the union while not incentivising other countries to vote in parties of similar mindset. For this reason, it’s going to be a massive year for the eurozone.
With this in mind, the ECB faces a tough choice when it meets in a couple of weeks in the first of its now 6-weekly meetings. The market has quite heavily priced in the adoption of quantitative easing from the ECB, which it has been rumoured to be preparing for this month’s meeting. However, with Syriza leading the polls which may cause issues around its membership of the currency block and therefore the ECBs willingness to buy its bonds, the central bank may be forced to rethink its plans and either exclude Greece or opt for some other form of stimulus, which I imagine the markets wouldn’t take to as well.
The UK is also becoming increasingly viewed by investors as one to steer clear of with a general election due later this year which is simply too close to call, a vote on EU membership in the pipeline if the Conservatives remain in power and the economy showing signs of broad based cooling following a strong 18-month run. The only thing that’s supported the currency recently has been the fact that the Bank of England is likely to be one of the first major central banks to raise interest rates but even this now looks unlikely until next year.
He construction PMI this morning providing further evidence of the cooling in the economy, falling to 57.6 from 59.4, much larger than the expected drop to 59. This was the third consecutive month that we’ve seen a decline in the number although we should take a couple of things into consideration with this. Firstly, a decline in construction activity in the winter months is not that uncommon. Secondly, 57.6 is still a very good reading and points to continued strong growth in the sector which should not be sniffed at.
The US session is looking a little quieter today but things will pick up as the week goes on. Between PMI readings tomorrow, FOMC minutes on Wednesday, jobless claims on Thursday and the jobs report on Friday, it’s not going to be a straightforward first week for investors although it should set things up nicely for the year.
The S&P is expected to open 9 points lower, the Dow 68 points lower and the Nasdaq 16 points lower.
[B]Oil below $50 and potential Greece exit dominate markets[/B]
Good Morning all!
The first full week after the Christmas period started off with a bang yesterday as equity, currency and commodity markets all posted big moves as fears surrounding the lower oil price and the political situation in Greece saw traders sell their assets. WTI Crude oil dropped below $50 a barrel for the first time since 2009 before rallying slightly to trade slightly higher than the huge psychological figure. T the start of 2014 oil prices had been around the $105 per barrel level, 12 months on the picture could not be any different with the global economy continuing to worry that a lower oil price could hit the large oil producing nations. During yesterdays equity session European, US and Asian markets all fell sharply with oil and energy stocks leading the major bourses lower. The Dow ended lower by over 300 points with the Nikkei ended lower by over 2.5%.
With the new year has come the same old problems for global financial markets with the supply glut and weaker demand for oil causing tumbling prices in both brent and WTI crude oil. The lower prices could well be driving a lot of oil producing nations in to extremely tough economic times as the current price drops way below the cost price for these countries to actually extract oil from the ground. With the likes of Russia and a lot of the middle east needing the oil price between $105 – $90 to break even you can see why a lot economies are struggling when the price is barely treading water at $50 a barrel.
Europe is the other major talking point in global markets yet again this week and it feels like we have moved full circle on the Eurozone crisis as markets are yet again dominated by a potential exit from the euro area by Greece. After years of political fighting and billions of Euros in bailout money it could be that we are closer to a Greek exit than we have ever been as the greatest power in the Eurozone now see the exit of Greece from the Euro as a viable option for a sustainable and recovery Eurozone. German Chancellor Angela Merkel has almost voiced her support for a move by Greece after years of being totally against any move to break up the Eurozone saying that she now believes that the Eurozone could cope with an exit. With elections called for later this month and populist parties who are opposed to further Eurozone led austerity measures leading the way in the polls it is almost a case of who will act first will it be Greece’s people voting for no Eurozone or will the ECB blink first and call for the change.
Of course Greece isn’t the only story in Europe as the ECB continues its internal fight to see whether the economy needs a full round of government bond buying quantitative easing pumped in. Mario Draghi has been hinting since last April that QE is something that could be looked at but over the last couple of weeks we have seen the strongest hints yet that stimulus will be added to the economy to try and boost growth and pull the ultra low inflation number higher. Wednesday will be a key day this week as the Eurozone CPI reading is released. Obviously a lower oil price is going to affect this reading, but a poor number cannot be just brushed under the carpet due to lower energy prices. The German reading yesterday showed CPI at its lowest level in 5 years and a continued week number as expected in Europe’s number on Wednesday would be further proof that the full round of QE could be ready for delivery as soon as next weeks ECB rate meeting.
Ahead of the open we expect to see the FTSE100 open lower by 11 points with the German DAX higher by 8 points.