Forex research

Good Morning!

Asian stocks extended losses for equity markets overnight as the energy and commodity story continued to dominate proceedings for global market. The oil price is the only thing that investors can focus on at the moment and with the drop in both WTI and Brent Crude oil continuing it currently seems that there is no light at the end of the tunnel. Many will be asking just how much lower this oil price can go before some kind of stabilising effect kicks in, however after every $10 fall experts have been calling the end of the slide but have seen it continue to drop like a stone. Traders will be looking for the $40 level now as a base for the oil price but after further comments from Saudi Arabia yesterday hinting of still no move to curb output then no one would be surprised to sees us drop yet lower than that level. Breakeven prices and Fracking costs have long been broken and it now almost seems we will keep going lower until the members of the OPEC cartel literally can no longer afford a slip in prices.

There are other stories moving markets today, with some important data due for release over the next few days. Europe and the potential QE and Greek exit from the Eurozone is the other main story that people are able to get their teeth into. This morning sees the all-important Eurozone CPI reading and it could well be the first time we see a period of deflation as the headline figure could potentially drop to -0.1%. However markets may not look to this as such a bad thing and could in fact see equities boosted as it would almost certainly confirm that a full blown program of QE was right around the corner and could be with us as early as next weeks ECB rate setting meeting. Gain we cannot look away from the oil price here as it would be the lower energy costs that drag the CPI inflation figure to this low. However the worrying factor for Mario Draghi and the ECB will be that the core CPI number, that strips out energy prices has still been falling at the same rate as the headline number just from a slightly higher base. This means that domestic prices are falling regardless of the drastic fall in oil prices.

AS the week now rolls on we get more and more data to work in tandem with the low oil price. Obviously today the CPI reading in Europe will take centre stage but this afternoon also sees us start to gear up for Friday’s non farm payroll number with the ADP payroll figure. Tomorrow sees the BoE policy meeting and despite not much expected, many will want to see if there is any hint of a change in monetary policy. Friday will of course see the payrolls and jobs report from the US, always a big story and likely to give yet more fuel to the markets along side this drastically low oil price that has the entire market panicking and playing the “risk off” card jumping out of risky assets and into the safe havens such as the US dollar and gold prices.

Ahead of the open we expect to see the FTSE open higher by 13 points with the German DAX higher by 19 points.

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Brent crude broke through the psychologically significant $50 a barrel this morning at the first time of asking, providing further evidence that traders are not interested in picking bottoms in the oil price collapse just yet, despite it being down more than 56% in a little over six months. This is the first time Brent has traded below $50 since May 2009 and the fact that traders barely even hesitated at this level makes $40 a barrel for Brent crude look extremely likely. With momentum only appearing to gather, I don’t even think it will stop there unless we see a change in stance from OPEC (more specifically the Saudi’s given their clear pull in the group) or US shale companies starting to fall, which is clearly what OPEC is banking on.

Brent is now wavering around the $50 level but this simply looks like a dead cat bounce more so than anything else, making further losses in the short term look very likely, just as we saw in WTI a couple of days ago. With traders playing such little attention to technical levels until now, it’s difficult to highlight key levels but there are many levels between current prices and 47.26 - April 2009 lows - that have been strong support and resistance levels previously so we may see sellers take their foot off the gas a little in this region. Should this break though, particularly today, then $40 and even $36.20 - December 2008 lows - look a strong possibility.

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[B]Focus turns to FOMC minutes as Brent pierces $50[/B]

Oil is once again what everyone is talking about this morning after Brent crude pierced the $50 a barrel level for the first time since May 2009, although there are plenty of other things to focus on today as the FOMC releases the minutes from its December meeting and we get the latest update on job creation from ADP.

The $50 level in Brent crude was widely seen as the next big psychological level at which traders may be tempted to lock in some profits or even be tempted to buy into the decline, although this was far from guaranteed as the same level in WTI proved to be nothing more than another hurdle that traders were more than happy to clear. We do appear to have seen more of a reaction to the level in Brent, with it having bounced as high as $51.63 since, although in the grand scheme of things this isn’t much better than the rally to $50.88 in WTI shortly after reaching the same level.

As it stands, this looks nothing more than a dead cat bounce and I expect traders to remain very reluctant to be overly bullish at these levels as the fundamental picture has not changed. I’ll be very surprised if the $50 level holds until the end of the day, let alone in the longer term. The fact of the matter is that there is still an oil supply glut and demand isn’t there. Unless one of these factors change, oil prices are going to remain very heavy. The decline may slow and probably will but I would not bet against both WTI and Brent breaking through $40 in the coming weeks.

It’s not just oil producing countries and energy firms that are feeling the pressure of falling oil prices, central banks in oil importing nations are also being put into an uncomfortable position, whether it being the Fed and BoE having to question the timing of the first hike or the ECB potentially being forced into bond buying despite an important election taking place in Greece only a few days later.

This morning it was confirmed that the eurozone has finally fallen into deflation territory for the first time since 2009, driven by a 6.3% decline in energy prices which won’t come as much of a surprise to anyone given the movements in oil prices. All other prices remained quite stable, while services actually rose by 1.2% which explains why the core reading rose to 0.8% from 0.7% the month before. The rise in the core reading may potentially give the ECB the opportunity to delay its next stimulus package until after the Greek election when it will have a much better idea of what it’s dealing with.

I don’t think the rise in the core reading has done anything to change the consensus opinion in the markets though, with equity markets appearing to react positively to the drop into negative territory of the headline figure, suggesting they’re still convinced that QE is still on the cards this month and potentially even more so.

The decline in oil prices doesn’t appear to be changing the Fed’s view on upcoming interest rate hikes from current record lows, with everything continuing to point to the middle of the year for the first hike. That said, with oil continuing to plummet, this may change and if we get any indication that this is the case in today’s minutes, it would more than likely have a major impact on the markets.

While the inflation decline in the US hasn’t been close to as bad in other countries, it is certainly heading lower and already below the Fed’s 2% target. If this is to continue, the Fed will be in the very difficult position of seeing a strong economic recovery but potentially being forced to leave rates at the current lows so as to not exacerbate the inflation problem. The minutes may provide further clarification on whether this is the case or if they consider the movement in oil prices to be temporary and not threatening thereby continuing on the course of rate hikes as planned.

Today also sees the release of the non-farm employment change figure which is seen as an estimate of Friday’s non-farm payrolls figure based on the numbers compiled by ADP, which provides payroll services to a large number of corporations. The release is generally not seen as a very accurate estimate of the official NFP figure but it can give an indication of whether we’re going to see a big swing away from expectations, which is more what this is used for.

The S&P is expected to open 12 points higher, the Dow 94 points higher and the Nasdaq 21 points higher.

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[B]Oil prices push back and lead equity recovery[/B]

Good morning!

Oil prices yet again have dominated the overall market direction over the last 24 hours as a slight rebound in major prices has seen equity markets recover losses incurred earlier in the week. However we are going to need to see much more of a recovery if prices are going to continue to recover as yesterday only saw a brief rest bite and a potential dead cat bounce on both WTI and Brent crude oil. However there has been talk over the last 24 hours that $40 could be the absolute price floor for oil as all oil producers continue to lose money even with the price above $50 a barrel. However those eyeing a price floor at $40 are also concerned that any recovery from this level may not happen until the second half of the year.

So with oil prices rebounding slightly and lower than expected Eurozone CPI hinting at a move to introduce QE at next weeks ECB meeting, equity markets were able to post some nice gains. However last nights Fed meeting minutes saw Janet Yellen warn yet again of global growth fears hitting all economies. Of course we know the Fed are well on track and the US is leading the way in terms of economic recovery but the global growth issue is something that all economies must be worried about. She also hinted that interest rates in the US could go up before inflation picks up. Of course inflation in the US is nowhere near as low as in the Eurozone, but yesterday showed that Janet Yellen is willing to stick to her plan without waiting for the oil price to drag the inflation level higher.

Later today we will get the BoE rate decision and of course the expectations for today’s meeting are no change across the board. In the UK we are almost sitting in a bit of a sweet spot in terms of the economy where currently things are both positive for the electorate and government/central bank. With growth figures, unemployment and average earnings figures moving in the right direction the government is happy with the current economic position. The one fear is of course the lower inflation figure, a figure which is insuring that while average earnings slowly go up prices remain static if not lower. It almost shows that at the moment there is no real need to push ahead with a change in monetary policy and we may not see a rate hike now in the UK until 2016. It also shows that the fear of deflation at the moment for the UK is not a totally bad thing after all, especially when the current government will be asking the electorate to go to the poll in the next 5 months.

The last two days of the week are obviously busy ones with the BoE following on from Eurozone CPI and leading into CPI from China overnight and then of course the all-important US jobs report and non farm payroll number tomorrow afternoon. So despite a lot of data already being release so far this week and the dominating oil price causing yet more big swings in markets, the moves are certainly not over for the week just yet, as the first full week of the new year continues to keep everyone on their toes.

Ahead of the open we expect to see the FTSE 100 open 72 points higher with the German DAX higher by 120 points.

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[B]Non Farm Payrolls to finish off busy first week back[/B]

Morning all,

The first week of the new year is nearly over and for very many it is not going to be a week that they quickly forget. With oil prices dropping below $50 a barrel, deflation finally in the Eurozone and some huge swings in equity and currency markets you could have been forgiven for thinking there had been no festive break at all. The week is not yet over in terms of the volatility either as later this afternoon we will see the release of the US non-farm payroll number within the jobs report. However before we get there we have seen inflation data from China overnight which has shown inflation hit a 5 year low falling to 1.5%, well below the government’s target of 3.5%. Yet again, and very much like the Eurozone number earlier this week, a main driver of the fall has been to do with the incredibly week oil price. However regardless of the oil price fall the fact that domestic prices are also so week is of course a cause for concern for China, with growth still struggling then ultra low inflation and global growth fears could well cause more jitters yet as we move into next week.

The last session of the week is set to be a fairly busy one on the economic calendar as traders also try and decide how to position themselves over the weekend after what has been a tumultuous week. Obviously there will not be too many traders moaning about the volume and volatility that has returned to global markets this week, however just how successful the week has been may well decide just how much risk people are willing to take on as we head in to the payroll figure later this afternoon. It has been a week where many have looked to take the risk of trade with many still dumping the pound and the euro in favour of the US dollar and gold. However equity markets have been mixed throughout the week, including a real mixed bag for some of the retailers in the UK on what has now been dubbed (as we can’t help but name days) super Thursday for the retail industry. This morning will see numbers out of the UK again today with industrial and manufacturing production as well as trade balance figures. It seems that the UK is actually sitting in a bit of a sweet spot at the moment in terms of the economy. With ultra-low prices and low petrol prices meaning the general public can happily put their hands in their pockets and spend money. While on the other hand strong growth figures are coupled with improving unemployment and Average earnings numbers and a falling deficit. It is rarely that things look positive for both electorate and government, but there is also no better time for this to happen than in the run up to a general election.

So on to the payrolls and what is expected , we are looking at a number around 240K this afternoon when we get the reading. This would be a long way below last month’s surprise jump over 300K and could cause a bit of disappointment. However Decembers number is always that little bit lower due to seasonal effects, however with the US economy well on track and the Fed happy with the state of monetary policy it could well be that this number does not actually hold much significance, unless drastically lower. Personally I think we could see a better number yet again, which along with positive numbers all over the economy is going to lead to earlier than expected rises in interest rates with my prediction being that we could well get the first rate hike by March. Whenever it is we get the first rate hike however it is not going to be unemployment that is an issue as today will most likely show that the job market in the US continues to improve and is doing so at a pretty fast rate.

Ahead of the open we expect to see the FTSE open lower by 6 points with the German DAX lower by 20 points.

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[B]Wage growth key in jobs report as Fed eyes rate hike[/B]

• Oil price stabilisation provides further boost for equities;
• US jobs report in focus as Fed prepares first rate hike;
• Investors may be overly optimistic on job creation;
• Wage growth key in providing inflationary pressures.

After a busy week in the markets in which most of the focus has been on oil prices, attention will turn to the US today with the December jobs report potentially providing the next catalyst for the markets.

The stabilisation of oil prices in recent days has given equity markets a boost as energy companies pare some of the significant losses sustained throughout the enormous sell-off in oil. Oil prices aside, the current environment is actually quite bullish for the markets, even with the Fed having ended its quantitative easing program in October and looking ever more likely to raise interest rates in June. The ECB is widely expected to announce its own bond buying program imminently and the Bank of Japan is already buying bonds on an extremely large scale.

With the market having accepted that interest rate hikes in the US are on the horizon, we no longer appear to be in a scenario in which good news in bad news for the markets. This is probably due to the very accommodative stance of other central banks but regardless, further evidence that the US economy is strengthening is generally viewed positively by the markets.

With that in mind, there is no batch of data that is viewed as being more important than the US jobs report which provides an update on job creation, unemployment, wages, hours worked and participation. While the unemployment rate and non-farm payrolls figures tend to make the headlines, it’s the other readings that I believe hold the key to when the FOMC will decide to raise interest rates.

Unemployment is expected to fall to 5.7% in December, very close to the level that the Fed deems full employment while 240,000 jobs are believed to have been created, the eleventh consecutive month that this number has exceeded 200,000 which is the longest stretch since 1994. It’s no wonder people are getting carried away with the recovery in the US and bullish on the dollar!

Taking that into consideration, it is extremely unlikely that these figures will change the FOMCs view on interest rates, regardless of what they are. What I would say though is given the strength in last month’s reading, I wouldn’t be surprised to see a figure well below the 240,000 as well as a downward revision to the November reading. I don’t think that will bother investors too much though as they should be more concerned with wage growth, hours worked and participation as its these that are going to create inflationary pressures going forward which is what the Fed is banking on. If we get signs between now and the June meeting that these are deteriorating, the FOMC may be convinced to push back the first hike.

The S&P is expected to open 4 points lower, the Dow 46 points lower and the Nasdaq 4 points lower.

[U][B]Read the full report at Alpari News Room[/B][/U]

At first look, the US jobs report was extremely impressive, 252,000 jobs created in December and November’s revised up from the already staggering 321,000 to 353,000, the highest since January 2012. Unemployment fell to 5.6% in December, only 0.1% above what the Federal Reserve deems to be full employment, at which point we should start to see some real wage growth and inflationary pressures, hence the need for a rate hike in the next 6 months.

Unfortunately that’s where the positivity around the report ends as participation fell back to 62.7%, which was probably largely responsible for the decline in the unemployment rate, while wages fell by 0.2% on the month dragging the yearly figure back to 1.7%. While this is still good, it’s certainly not the report the FOMC was hoping to see, with all of the metrics they are most interested in right now disappointing. I don’t think this changes the outlook for the first rate hike this year but a couple more months of the same and they may be start to consider waiting a little longer until they are more convinced on the sustainability of the recovery.

The market reacted almost exactly as you would expect to this report, with the dollar strengthening immediately after the release as traders react to the job creation and unemployment numbers, before pulling back as the wage and participation readings take some of the shine off the report. All things considered, the report is still strong and I’m sure wage growth and participation will improve in the coming months as the recovery goes from strength to strength. Given that many jobs that are created in the holiday season are low paid, we maybe shouldn’t be too surprised at the decline in wage growth and instead be pleased with the level of job creation.

[U][B]Read the full report at Alpari News Room[/B][/U]

It would be hard to imagine a more volatile and unpredictable year than the one we’ve just left, and to some extent we enter 2015 with many questions to be answered.

From a financial markets standpoint, the prospect of major political and economic turmoil means that price volatility is almost guaranteed. The major disparity seen between weaker regions such as the eurozone and Japan, compared to the stronger performers such as the UK and US, will be front and centre given the divergent paths of monetary policy between the two camps. With that in mind it is worth taking a look at what could be some of the major themes throughout 2015.

[B]Political instability[/B]

From a political view, the focus will largely be on European elections, which given the rise of anti-austerity and anti-EU sentiment means that there will be a push towards more isolationist policies by the dominant parties, as a means to appease the clear unrest seen throughout some of the major economies.

The UK election in May is no doubt going to be dominated by the question of how far both Labour and the Conservatives will go towards the anti-immigration rhetoric touted by UKIP and Nigel Farage. Teresa May’s announcement that international students will be ejected from the country immediately after finishing their qualifications highlights this, and points to a crude and reactionary policy which is focused upon appeasing voters despite essentially leading to a brain drain from UK institutions.

However, given the fact that the UK seems to be headed towards a referendum upon EU membership, the UK’s ability for options which can limit mass immigration without leaving the union will be important as a means to deter people from voting in favour of the drastic move to the exit doors.

[B]Greek election[/B]

On mainland Europe, the Greek election on 22 January is the first and one of the biggest of multiple flashpoints which could greatly affect the structure of the eurozone as we know it.

The rise of the anti-austerity Syriza party means that the single currency region could be a much more confrontational place very soon. Given their promise to write-down debt and alleviate the pressure of the austerity measures which were implemented as a prerequisite to gaining funds, there is little chance that the likes of Germany will want to lose out on both fronts. As a result, Angela Merkel has already been warning voters through an apparent ‘leak’ that the Bundestag have been preparing for a Greek exit.

For the most part though, it is highly unlikely that of all countries, Germany would want to initiate the breakup of the eurozone, yet should Syriza get into power, it would without doubt be a bumpy road ahead, and the threat of contagion throughout the eurozone would be critical. With the likes of Spain and Portugal also due for elections this year, we are expecting to see political instability play a significant role in 2015.

[B]Oil price slide[/B]

The incessant fall in oil prices through the second half of 2014 gained in importance once it became clear that rather than simply being a result of heightened supply, it was also being driven by an agenda from Saudi Arabia, who plan to reduce prices to a level which would make many of the worldwide drilling and fracking operations economically unviable.

This means that we could see global supply come down eventually, but that could take time, with much of the investment in drilling having been assigned for a while yet. With Russian oil output has hitting a post-Soviet Union record high, and Iraqi oil exports at their highest levels since 1980, there is significant doubt as to whether the falling prices are going to force output lower.

The current trend clearly shows that those countries outside of OPEC are deciding to actually increase their exports to compensate for a lack of earnings at previous levels, and given that restrictions upon Iranian exports could be lifted at some point in 2015, we could yet see another major oil producer hitting the markets with major supply.

The impact of the recent falls in oil prices are far-reaching, to say the least. There are mixed feelings for many, with the energy sector no doubt feeling the brunt of this shift and subsequent job losses are likely to follow once companies refrain from drilling, due to the loss of profitability at lower prices. However, on a macro level, it is less clear, with economies reliant upon oil exports set to lose crucial tax revenues while net importers should gain from the lower prices. However, aside from that, there is a more widespread boost to the rest of the economy, where lower oil and gas prices will lead to a greater degree of disposable income to be spent by consumers. Therefore retail firms will no doubt see 2015 as a massive opportunity to boost sales for luxury items and experiences such as holidays.

Lower oil prices also mean that the costs of production will be cut significantly and this can only be a good thing for everyone. While producers will no doubt pass a lot of this saving on, it is likely that they will also take the opportunity to increase profit margins and so transport-reliant industries are set for a particularly good year.

[B]Inflation and its impact on central banking[/B]

The influence of these falling oil prices are no doubt going to compound the problem of disinflation that has been felt around the world. No more so than in the eurozone, where markets are still reeling from the announcement that CPI fell to -0.2% in December 2014. This move into deflation could be the first month of many such announcements, and puts pressure on ECB president Mario Draghi to finally introduce a fully-blown quantitative-easing programme.

The fact that deflation has finally arrived is hugely significant, but perhaps the most important question is when the eurozone will move back into inflation. With oil prices tumbling, the pressure will no doubt be downward for global price growth and this is going to have a profound effect on central bank policies.

The ECB appears to be on the cusp of a round of fully-blown quantitative easing, which is likely to continue the equity rally seen throughout 2014. However, the delaying of interest-rate hikes from the likes of the US and UK is likely to be just as important, leading to a continued emphasis on credit and investment over savings across the western world.

The impact of current inflation levels hasn’t yet taken hold within the likes of the UK, US and China, to the same extent as it has within the eurozone. However, the signs are that the impact of falling oil prices will invariably catch up with inflation data in the end – and once it does, there is little doubt that the central banks will have to take heed and act accordingly. Given that the norm for central banks is to see price stability as their core mandate (this typically means price growth around 2%), the move lower in prices will no doubt have a massive impact upon the degree of monetary policy seen globally.

[U][B]Read the full report at Alpari News Room[/B][/U]

With a big week in the market just gone, trading activity and excitement seems to have built up given the volatility seen as a result of the plummeting oil prices and continued talk of the possible introduction of a QE programme by the ECB later this month. The week ahead looks somewhat more mixed, with real major releases somewhat few and far between. In the US, the release of retail sales provides us with a greater degree of understanding regarding consumer behaviour. Meanwhile in the UK the CPI figure due out on Tuesday is going to be absolutely crucial following the oil induced fall into deflation for the eurozone. On the topic of the eurozone, the European court of justice ruling on Wednesday will bring the validity of the OMT programme back to the fore.

In Asia, the lack of any major releases means that we will be looking towards Australia as the main source of overnight newsflow. The Australian jobs report on Thursday represents the most significant release to watch out for.

[B]US[/B]

The US region has by far the most significant events this week, given the somewhat thin week ahead for most countries. That being said, there are few that genuinely provide a significant likeliness of volatility following their release. Of the events to watch out for, the retail sales figure on Wednesday along with Friday’s CPI and consumer sentiment survey releases are the ones I am most keenly following.

The first of these is also possibly the most important, with the retail sales number representing the tangible result of both consumer sentiment and spending behaviour in December. Given that December is such a crucial month for the retail sector, all eyes will be focused on this number, following a strong November reading. The black Friday to cyber Monday trend seen throughout the US means that alot of the Christmas purchases are likely to have been made either in November or at a discounted price. For this reason, there are a number of people who believe we are going to see a weak number this month and the consensus is that there will only be a 0.1% rate of increase compared to the 0.7% figure in November. Given that the US economy is massively driven by consumer spending and behaviour, be aware that spending figures provide a great indication of economic activity in December which will no doubt impact growth figures.

On Friday, the US CPI figure is released, with many now watching closer than ever following the incessant fall in oil prices and the impact that is expected to have upon the inflation rates. In the US, the main measure of price growth is the PCE price index and for this reason, the CPI level is somewhat less crucial than in countries such as the UK and eurozone. However, given that the eurozone saw deflation in December it is going to be crucial to see whether this is going to be a global trend where falling oil prices push all the headline inflation rates lower. Should we see this week’s CPI figure fall lower than the -0.3% seen last month, it could be a cause for concern at the Fed and may indicate softness in the PCE number later this month.

Finally, the release of the University of Michigan consumer sentiment figure brings yet another focus upon the outlook of consumers in the US. Given that so much of the US economic growth can be attributed to domestic spending, a confident consumer base is key to seeing more of the strong GDP figures that have been evident in the US throughout 2014.

[B]UK[/B]

A quiet week in the UK, where the biggest release to be watching out for will be Tuesday’s CPI release, following the global impact of falling oil prices. Much like the eurozone, the most important inflation reading in the UK is the CPI figure and in the same way that the ECB is expected to introduce QE as a result of falling inflation levels, the BoE will be watching very closely to see if any further downside in CPI will impact their monetary policy decisions. The likeliness is that should we see that move lower in inflation to any major degree, it will serve to reduce the likeliness of a rate hike in the near future. With that in mind, the yearly figure is expected to pull back from 1% to 0.7% for December. That is likely to be largely driven by oil prices, and given that the eurozone saw a fall from 0.3% to -0.2%, there is reason to believe it could an be even bigger fall. With the target rate of inflation set at 2% for the BoE, any move below 0.7% could bring serious anxiety at the BoE, limiting their ability to tighten monetary policy anytime soon.

[B]Eurozone[/B]

Yet another quiet week in prospect in the eurozone, where the only major event of note comes in the form of a hearing at the European court of Justice, where the validity of the OMT programme comes under the spotlight. This follows the decision from the German Federal Constitutional Court to refer a list of questions to the European court regarding whether the consistent with primary EU law. The feeling within Germany is clearly that the ECB has overstepped its mandate and constitutes monetary financing of member states. However, this OMT programme provided a crucial backstop to sovereign debt and thus allowed the eurozone to survive during the height of the crisis. To some extent, the OMT programme is significantly less important than it was when introduced and that takes some of the sensitivity away from the issue. It is also worth bearing in mind that this ruling will largely be seen as advice to the Germans and thus the final decision from the German constitutional court will be more important. Nevertheless, it’s worth watching out for this event despite the fact that I think it will somewhat go under the radar for many.

[B]Asian & Oceania[/B]

A distinct lack of market moving events within Asia means that we are looking towards Australia to provide volatility overnight and from that perspective, it is going to be Thursday’s jobs report which is by far the most interesting event of note. Unfortunately the trend for Australian unemployment has been far from impressive, with the 2008 low of 4% leading to a consistent rise towards the 6.3% level seen last month. Expectations point towards the figure remaining steady, but at some point we need to see a turnaround of sorts and that clearly has not been happening. The only beneficial figure which we have been seeing is the employment change figure, which has been positive for the past two readings. On this occasion, the expectation is that this number will pull back somewhat towards around 3.8k from 42.7k.

[U][B]Read the full report at Alpari News Room[/B][/U]

Good morning,

The week ahead may not have as much to offer as the one just gone when it comes to hard hitting economic events, but with oil prices already making some significant moves overnight it would take a brave person to bet against these high levels of market volatility continuing.

At times last week investors were starting to feel a little bit more bullish as oil prices began to stabilise around $50 a barrel for Brent crude, giving equities the opportunity to pare some of the losses that have come with the decline in oil prices. However, that was only to last a couple of days with Friday bringing more volatility as oil prices dipped below the psychologically important $50 level and the US released it’s widely followed jobs report which was seen as largely positive by the markets.

Brent may have recovered to close back above $50 at the end of the week but with prices opening lower overnight and now trading around $49.30, I think we’re going to see plenty more volatility in the coming days as pressure mounts on oil producers to scale back production before prices get dangerously low.

Many people view $40 to be the level at which some producers may start to seriously struggle and be forced into cutting production. While many US shale companies may be hedged against these low prices for now, they’re also quite heavily in debt and require prices to be much higher if they’re going to be able to maintain the current levels of output. OPEC is effectively banking on this and I don’t think we’re too far away from that now. Oil may not have bottomed out quite yet but I think some of the bigger players in the markets may start to look at prices being quite cheap and see some good buying opportunities.

While oil is likely to continue to be a major driver in the markets this week, today also marks the unofficial start of US earnings season with Alcoa releasing fourth quarter results this evening. With the likes of JP Morgan, Goldman Sachs and Wells Fargo following this week, any stabilisation in oil prices may shift the focus to company earnings, especially with the week being so quiet on the economic data front.

The FTSE is expected to open 5 points higher, the CAC 11 points higher and the DAX 37 points higher.

[U][B]Read the full report at Alpari News Room[/B][/U]

[B]Oil continues slide despite record Chinese crude imports[/B]

• Oil prices tumble again, weighing heavily on the energy sector;
• More reports of ECB QE supporting European stocks despite plans appearing flawed;
• Record Chinese crude imports fail to provide any support for oil;
• UK inflation in focus in quiet day of economic releases.

Another sharp decline in oil prices overnight weighed heavily on US energy stocks, while in Asia a better than expected trade balance update from China helped support stocks in the region.

As is quite often the case at the moment, oil prices are largely dictating play in the financial markets with energy companies acting as a major drag on the markets despite the fact that people are generally in agreement that lower oil prices are actually a net positive for the global economy. Of course, energy companies and countries heavily reliant on oil revenues will not be pleased to see the decline but overall, it’s difficult not to see this as a good thing.

With the upside to lower oil prices being overlooked at the moment, I wonder if there’s a strong rally in equity markets just around the corner, once oil prices begin to stabilise. I don’t think this stabilisation is too far away with $40 widely seen as being a very significant barrier for prices. This should come around the time that consumers really start to see the benefit of the last 6 months slide in prices, with one place in Birmingham already selling petrol below £1 a litre, something we haven’t really seen since around October 2007. Once the savings begin to filter through to the public then I expect to see a big upturn in spending in other areas such as retail.

It was interesting to see how little an impact the Chinese trade balance figures had on oil prices overnight, as they continued to tumble despite the world’s second largest economy importing a record amount of crude, above 7 million barrels per day. This clearly shows that while global demand may be weaker that it’s been in the past, the collapse of oil prices really is largely driven by the supply glut and the demand side just isn’t helping matters. Overall the trade figures were encouraging although domestic demand really does remain quite weak, despite efforts being made to boost it, meaning Chinese exports are still hugely important to the country as it attempts to shift towards a more domestically driven economy.

European stocks were very resilient against the slide in oil prices yesterday and ahead of today’s open, it looks like we’re going to see more of the same. Yesterday’s reports that the European Central Bank is drawing up plans for a quantitative easing program based on the contributions of the country to the central bank gave a significant boost to European stocks. As was the case when the US was buying bonds, we tend to see inflated prices in stocks and bonds and this is exactly what investors are preparing for now.

Aside from the additional liquidity that this will throw into the financial system, I don’t really see how this will help the eurozone in any way. Countries like Germany will benefit most from the bond buying program as they make the largest contributions but with yields already below 0.5% on 10 year debt, I don’t see how this will make much of a difference. If we do see this announced by the ECB when it meets next week, unless it’s accompanied by efforts to improve the movement of cash to the areas where its needed most, as well as initiatives to boost demand, I think it’s going to get a lot of criticism. The only positive thing would be that unlikely many of their initiatives in the last 12 months, this should succeed in growing the central banks balance sheet, even if the aid is going to the wrong places.

We have another quiet day in store with regards to economic data, with UK inflation figures the only notable readings this morning. While these are worth keeping a close eye on, expectations for the first Bank of England rate hike have been put back so far now - early 2016 in many people’s opinions - due to the central banks admission that inflation is likely to fall further, that there’s not much to read into today’s numbers. Unless we get a much larger than expected decline, that is, which could suggest that the disinflation problem is much greater than the BoE is anticipating.

The FTSE is expected to open 7 points lower, the CAC 4 points lower and the DAX 5 points higher.

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[B]Oil falls further but markets rally on ECB stimulus hopes[/B]

Oil prices have continued to slide on Tuesday but stocks appear to be building some reliance to the decline, with European indices and US futures both trading comfortably in positive territory.

This is the second day in which oil prices have continued lower while European indices have headed higher. This is undoubtedly being helped by all the speculation surrounding the European Central Bank and the quantitative easing program is has been preparing in time for the next meeting on 22 January. While many people may be in agreement that the package will not address the real issue in the eurozone – especially if rumours yesterday that bond purchases will be based on each country’s contribution are true – it is clear that it will prove stimulative for the markets as it means liquidity being poured into the financial system.

Oil fell to a near six year low today as UAE oil minister Suhail bin Mohammed al Mazroui claimed OPEC will not change its strategy on production meaning the game of chicken between it and the US shale industry will continue for some time yet. Mazroui stressed that OPEC will not be meeting before the next scheduled event in June which effectively cements their position until at least that date. You get the impression that the only way OPEC would be willing to discuss production cuts at this stage is if similar cuts were agreed by the US shale companies. Given the debt levels of these companies and their costs, I would not be surprised if this happened in the coming months.

Until that happens, oil prices could continue to push lower which means inflation in many countries will also continue to head south. The UK is one of those countries that has seen inflation fall rapidly, largely thanks to the fall in oil prices. Prices rose by only 0.5% in December, down from 1% the month before and well below the 2% target set by the Chancellor or the Exchequer George Osborne. The fall below 1% means that BoE Governor Mark Carney is obliged to write a letter to Osborne explaining when the central bank expects inflation to return to target and what will be done to achieve this.

Food prices also contributed to the decline in prices as the price war continues between Britain’s big four supermarkets in an effort to win back market share after bargain retailers took a significant chunk throughout the great recession. While people will be quick to compare the low inflation in the UK to that of the eurozone, which fell into deflation territory last month, the two situations could not be more different and therefore should not be compared.

While the eurozone is seeing broad based deflation, high unemployment and therefore no wage growth, UK unemployment is very low, wages are already starting to rise – which brings with it inflationary pressures – and the areas in which we’re seeing deflation don’t carry the same threat that others would. People worry about deflation because it encourages people to delay purchases in the expectations that prices will fall, leading to a negative spiral of events. This would never be the case with food and oil so in fact, all that’s happening is people’s compulsory costs are being reduced leaving more money to spend elsewhere. This can’t possibly be a bad thing.

This afternoon we once again have very little data being released in the US. JOLTS job openings for November could be of interest but with the lag being so significant, you have to question whether the markets are even paying attention to these. Corporate earnings season got unofficially underway yesterday, with Alcoa announcing fourth quarter results. We have a few more big names reporting this week, including some major banks but even this is looking a little quiet today.

The S&P is expected to open 12 points higher, the Dow 107 points higher and the Nasdaq 30 points higher.

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• Europe seen lower as lower oil prices continue to weigh;
• World Bank revises down growth for 2015 and 2016;
• ECJ to give verdict on OMTs, potentially paving the way for QE this month.

The continued decline in oil prices is seen putting further strain on indices ahead of the European open on Wednesday, even as the ECB draws up plans for its widely anticipated bond buying program which is expected to be announced next week.

Quite often, central bank stimulus will trump most other things in the eyes of investors with more market liquidity meaning stocks must go up and bond yields must come down. Or at least, that has been the lessons from the last six years or so. However, it seems in falling oil prices, quantitative easing has met its match with energy companies weighing heavily on any gains being made on QE expectations.

The lower open expected in Europe has not been helped by the World Bank’s new global growth forecasts for this year and next, both of which were revised lower. While the bank warned against relying on the US economy to drive global growth, it did highlight the opportunity that lower oil prices represents for oil-importing nations including China and India. Exporters of oil are expected to suffer quite considerably, especially Russia which is also battling against economic sanctions imposed by the West for its involvement in Ukraine, which is why the country is seen contracting by 2.9% this year.

The World Bank also highlighted some potential banana skins for the coming years, although none of these come as any surprise given they are the same things that have been discussed by analysts and economists everywhere. Higher borrowing costs in developing countries as a result of financial market volatility was top of the list, which also included setbacks in global trade if the eurozone or Japan falls into a prolonged period of stagnation or deflation and Chinese debt levels.

The European Court of Justice will this morning announce its decision on the legality of the Outright Monetary Transactions (OMTs) which was introduced as a backstop by the ECB but has never been tapped. The introduction of this as a backstop was a massive turning point for the eurozone and the fact that it was never used suggests it never will be and therefore, with regards to the OMT itself, today’s ruling doesn’t really matter. Not to mention the fact that it is non-binding and therefore the ECB could still, if it wants to, utilise the facility if it ever wished. However, if the ECJ deemed it to be outside of the ECBs remit, you can only imagine they would accept its decision.

With that in mind, this morning’s ruling is being viewed as the red or green light for the ECB to announce a bond buying program which some have claimed, like the OMT, would be illegal. Given that both involve the purchase of government debt in the secondary market, this ruling effectively rules on whether it constitutes government funding or not and therefore falls within or outside of the central bank’s remit. Given how much QE has now been priced in, it will be very interesting to see how the markets react to the ruling. If it’s bad news for Mario Draghi, we could see some extreme volatility in the markets.

The FTSE is expected to open 84 points lower, the CAC 72 points lower and the DAX 150 points lower.

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This morning’s European Court of Justice ruling may not have been legally binding but it would have given those in Germany that believe the outright monetary transactions (OMTs) and quantitative easing (QE) do not lie within the ECBs remit a strong case if it comes to either be needed, with the latter potentially being announced next week.

Unfortunately for them, the ECJ appears to have ruled in favour of Mario Draghi and the members of the ECB that support both programs. The ECJ Advocate General this morning confirmed that the OMT may be legal although this was dependent on certain conditions being met. In principal, it was ruled that OMTs are in line with the EU treaty as long as there is no direct involvement in financial assistance programs for the member state. In other words, as long as the ECB is purchasing bonds on the secondary market, bond purchases are neither breaking the rules of the treaty or outside of its mandate. It did state though that the ECB must outline the reasons for adopting the unconventional measures, something I’m sure Draghi will be more than happy to do.

The ruling has dealt a massive blow to those that oppose both policies, none more so than Jens Weidmann who, despite his softening stance on QE, has been openly against such programs on the belief that they constitute government funding.

In reality, this ruling makes little difference to the OMT program, for now at least. No country has utilised the OMT program and all are in a much better position now than when it was announced and therefore no one is likely to. The most important thing the OMT program did was provide an important backstop for the eurozone which in turn brought yields on debt significantly lower. It effectively did the job it was designed to do and I don’t think the ECB ever expected it to ever be utilised.

The reason why this ruling was so important was because of the implications it could have had for QE, which the ECB is expected to announce next week. Had the ECJ ruled against OMTs, Draghi would have come up against significant opposition as the two programs are very similar. Both involve purchasing government bonds on the secondary market, which some have argued constitutes government funding. With this hurdle now out of the way, Draghi is free to announce a bond buying program without fearing a backlash from those that previously called it illegal and outside of his remit.

Equity markets rallied following the ruling, as investors cheered the removal of another QE hurdle. The only one that remains now is the Greek election a few days later, which is likely to influence next week’s announcement. Whether it will delay it for another month is tough to say but the markets would suggest not. Either way, QE now looks inevitable, if not at this meeting then in March. The only question now is how it will be implemented, with the ECB having a far tougher job that its US, UK and Japanese counterparts.

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